Session 001: What's a bond (onshore/offshore)? Q&A

Q. Is it advisable to use children as lives assured on a bond?

A. Who the lives assured should be depends on the specifics of the case. If the intention is for the bond to continue post the owner's death then it may be appropriate to use young, healthy lives assured. 

Q. Can a LA decline to be a LA?

A. Lives assured are not required to sign the application. They also have no legal or beneficial rights in their capacity as life assured. However, they should be told and if they don’t want to be the named life assured they shouldn’t be named as one. This is particularly important for data protection purposes.

Q. Can you add a Life Assured?

A. Most providers do not allow the lives assured to be altered as this is classed as a "fundamental reconstruction" and triggers a chargeable event.

Q. Can a client with a single life assured investment bond add his spouse to the bond as a 2nd life assured (ill-health)? Any tax implications to be considered?

A. See response to previous question.

Q. Can a younger life assured be an adult child who lives in USA?

A. Yes, the residence of lives assured are irrelevant for the purposes of setting up the bond.

Q. Is IHT payable on the death of the settlor even with surviving lives assured?

A. It’s not clear what this question is asking. If you are asking whether having surviving lives assured on the bond will irradicate any IHT considerations on a failed gift of a bond into trust, then the answer is no. The IHT regime applies to gifts. The fact there may be a surviving life assured on the gifted bond just means the settlor's death will not cause a chargeable event to arise on the bond. 

Q. Is Joint Tenancy the only option when setting up a bond with more than one proposer? Perhaps not ideal for two unmarried persons (siblings, business partners)?

A. Yes, it would be joint tenancy.

We agree a joint tenancy arrangement could be problematic in such scenarios, unless of course the intention is for the survivor to become the legal and beneficial owner on first death.

Q. Can new Trustees be appointed after issue? If so, who can do this? What happens if all Trustees die before the bond ends?

A. Trustees can be appointed after the trust has been created. The process for doing this will depend on the terms of the trust being used. In the absence of any specific provisions relating to replacement of trustees in the trust deed, the process is covered in s36 of the Trustee Act 1925. Where all trustees have died, the personal representatives of the last trustee to die can either appoint a new trustee or themselves to act as trustee and manage the trust. This is also covered in s36 of Trustee Act 1925.

Q. So with tenants-in-common, one life assured could leave their share of the bond to children (if also lives assured)?

A. Lives assured are not relevant as they have no legal or beneficial ownership rights in their capacity as life assured. It is the bond owners who will own a bond on a joint tenancy basis. The owners may or may not be the lives assured.

A bond would not be set up with two individuals on a tenants in common basis. At the application stage, if a married couple or civil partnership were looking to invest in a bond, if they didn’t want the survivor to become the sole legal and beneficial owner of their part of the investment, they would each set up their own separate bond.

If joint tenancy was suitable at the application stage but at later date they wanted to own 50% independently, you wouldn’t normally sever the tenancy so it was held tenants in common. The general approach for married couples and civil partners would be to execute a joint to single deed of assignment so they own half the segments each.

For example, let’s assume the bond has 20 segments with policy sub-numbering as 12345A 000-019. One deed would be executed by Mr & Mrs to assign segments 12345A 000-009 to Mr as the assignee. Another deed would be executed by both to assign segments 12345A 010-019 to Mrs as assignee. The result is Mr owns 10 segments in his name only and vice versa for Mrs. That would allow each party to make provision for who benefits from their segments in their own will.

Changing the ownership using a deed of assignment would not alter the life assured basis of the segments and lives assured generally can’t be changed. If the bond provider did allow a change, it would be deemed a fundamental reconstruction and trigger a chargeable event.

Splitting tenancy is something that might occur post first death of a joint tenancy bond using a deed of variation. It’s not a common scenario and you would need to seek guidance from a solicitor.

Q. Please can you just explain the terminology “beneficial ownership”?

A. The beneficial owner is the person for whose benefit the property is held which might not be the same person(s) as the legal owner(s).

For example, if I invest in my money in a bond I would be the legal and beneficial owner. If I died but the bond continued (as there was a remaining life assured or on a capital redemption basis), my personal representative(s) would become legal owners during the estate administration period and hold the benefits of the policy for the beneficial owners i.e. those entitled under the terms of my will or the law of intestacy if I had no will.

If the bond is held in trust the trustees would be the legal owners and the trust beneficiaries would be the beneficial owners.

Q. Would a returning expat with no children (and nephew/niece as the beneficiaries) be better off in an offshore life policy or in a capital redemption bond?

A. I don’t think the fact the client is returning to the UK would be a relevant factor for a new bond.

If investing once they become UK resident then the first decision would be whether to use an onshore or offshore which would be a tax led decision. If the client is investing for the ultimate benefit of the niece and nephew with the intention of future gains being assessed against them (not the client) then the onshore vs offshore decision will be based on their likely future tax positions.

If the niece and nephew are likely to be non-taxpayers with the ability to crystallise future gains with little or no tax then an offshore bond is likely to be the most appropriate route. You are then deciding on life assured vs capital redemption and this decision is also tax led, but specifically planning around whether death of a life assured (automatically triggering a chargeable event) would be the best outcome. This will depend on the clients tax position and whether they intend to remain owner or gift the bond into trust. There are a couple of examples in the answer to the following question that you should find helpful in relation to this matter.

Q. On a CR basis - can the term be set at say 20years? Also, what are the typical planning uses for bonds on a CR basis - examples would be helpful?

A. No, the term is set at 99 years.

The selection of offshore CR basis essentially comes down to chargeable event planning.

Will it be more tax efficient to have the bond end on someone’s death (and automatically trigger a chargeable event) or not end on someone’s death.

Example:

John is a higher rate taxpayer. He wants to invest £40,000 into a bond and gift it into a discretionary gift trust for his two children. The intention is to distribute trust funds to the grandchildren while they are at university and non-taxpayers.

If an offshore bond is set up with John as the sole life assured and he dies before the trust fund is distributed to the children, his death would automatically trigger a chargeable event and the gain assessed against him at his marginal rate which would not be tax efficient.

If the bond doesn’t end on his death it will continue and the trustees can then look to assign segments to the children later and crystallise gains more tax efficiently, potentially with no tax, due to available unused personal allowance, starting rate for savings and personal savings allowance.

To ensure the bond doesn’t end on his death the bond could be set up with his children as lives assured. Statistically they are obviously expected to outlive their father but that unexpected death can happen so this is not a watertight solution. If an offshore bond has already been decided then this objective, to ensure the father’s death doesn’t trigger a chargeable event, can only be guaranteed with the CR basis.

On the flipside, let’s say John elderly with modest income just above the basic rate band. There’s no trust but anything left in the bond on his death will be shared equally between his two children in accordance with his will. His two children are higher rate taxpayers and always likely to be. In this scenario it’s likely to be more tax efficient for John to be the sole life assured so that the gain on his death is assessed at his marginal rate, rather than continuing (because the children are lives assured or set up on a CR basis) and then assigned to them with future gains assessed against them. Or surrendered by personal representatives and the children assessed as receiving estate income – this is something that will be covered in Bond School Session 004 and 005.

Q. What are the typical key planning uses for bonds on a CR basis - examples would be helpful?

A. Please see the answer to the above question.

Q. Why is capital redemption only available offshore?

A. It’s an esoteric subject but our broad understanding is that a capital redemption policy doesn’t satisfy the conditions for UK life assurance business rules but is an allowable for overseas life assurance business rules.

Q. Why can't an onshore bond be on a capital redemption basis?

A. See answer to previous question

Q. If you are making withdrawals from the life assured bond would it still be disregarded for LTC purposes?

A. Our understanding is that it's likely the local authority would treat existing regular withdrawals as notional income and take it into account in the financial assessment for LTC purposes.

Q. Are Life Assurance Bonds assessed for care if income is being taken in the form of withdrawals?

A. See response to previous question.

Q. If you replace an older Life Assured bond with a newer life assured bond for growth and income purposes, would this be looked upon for LTC from the initial bond?

A. When considering deprivation of assets in respect of life assurance investment bonds, the local authority look at when money that was in-scope so to speak was invested into the life assurance environment. For example, when cash was invested in a bond or perhaps a directly held OEIC was cashed in and the proceeds reinvested in a bond.

With this in mind, the local authority should treat the start date of the original bond as when the money was invested into the life assurance regime. The fact the original bond has been surrendered and reinvested into a new bond for other financial planning reasons should not have an impact.

If a local authority use the new bond start date for their assessment but the original bond was set up when client could not foresee the need for LTC and the bond was not used to deliberately used to achieve the disregard, then it is possible to challenge their decision if you belief their decision is incorrect. This can be done by raising the matter with the Local Government & Social Care Ombudsman.

Q. Be very careful about disregard for means testing. Whilst this was asserted before under CRAG, it is still up to the Local Authority to make that determination

A. While we agree that it’s the local authority who will make the decision, all local authorities should be acting in line with the regulations. Unfortunately, some local authorities interpret the regulations differently from others which can lead to incorrect decisions.

If you disagree with a local authority decision the matter should be raised with the Local Government & Social Care Ombudsman. You should find their 2022 Deprivation of Capital report helpful. An investment bond case is discussed in one example in the report -

Demanding inappropriate information on jointly owned assets: case reference 19 012 152

Q. How do you prove deliberate deprivation of assets?

A. It will depend on the facts of each case i.e. the individuals actions and motives.

You should find the link to the Local Government & Social Care Ombudsman Deprivation of Capital report in the answer to the above question helpful. In particular, the following extract from page 2.

For a council to treat someone as possessing notional capital it must therefore be satisfied both that they have:

• deprived themselves of an asset, and;
• have done so with the intent of reducing what they have to pay towards the cost of their care and support.

Q. Social Security Commissioners Decision R (IS) 7/98 which rules that an investment bond falls within the disregard by virtue of its intrinsic nature

A. Agreed.

Q. Is the disregard for care the same as the smoothed ISAs?

A. Yes, if it’s a life assurance ISA the normal regulations for the disregard of life assurance apply to the life assurance part of the ISA arrangement. However, it would not apply to other funds not held within the life assurance part e.g. non-smoothed funds.

HMRCs ISA Manager guidance states:

A policy of life insurance (as determined under general law) is eligible to be included in the ISA if the following conditions are satisfied:

• the policy is on the life of the ISA investor

Q. If you place a capital redemption bond within a discretionary trust, does this prevent the funds from being included in the care cost assessment?

A. In our opinion the local authority would consider whether the gift was deliberate deprivation, rather than concentrate on whether it was a capital redemption or life assured based bond that was gifted into trust.

Q. When assigning segments to a beneficiary, do the lives assured remain the same as they were when the bond was set up?

A. Yes. Remember that being named a life assured has no relevance to legal ownership or beneficial entitlement.

Q. I take it that the assignee is assumed to have held the segs since inception and can top slice over previous years but will also have the gain since inception?

A. Correct

Q. Why do you limit the number of segments to 2 for your onshore bonds?

A. We don't. Did you mean 20 segments? The default number of segments is 20 if there is no request for a different number. Currently, you can get up to 100 segments on our onshore bond but the product team are considering an increase to this number, hopefully sometime this year.

Or did you mean the maximum number of lives assured on our onshore bond which is two. This is due to the terms and conditions of the product which were established when the product was launched.

Q. What is the maximum number of segments you can have?

A. This is entirely down to the product being used and varies between providers/products.

Q. Is there a reason many bond providers provide a default number of segments which is far lower than the maximum?

A. The maximum number of segments for a bond is down to the product being used and varies between providers/products.

Q. If you assign segments to a member of your family, what happens with IHT on those assigned segments on death of the life assured. Does the 7 year rule apply?

A. Yes. If a bond is assigned outright by way of gift to another individual it will be a potentially exempt transfer for IHT purposes and will be included in the assignor's IHT calculation for 7 years.

Q. So, to clarify, post death of policy holder but pre death of life/lives assured the bond could be assigned?

A. Yes. The owner's death does not cause the bond to come to an end unless they were also the last life assured on the policy. If there is still a life assured alive on the owner's death, the personal representatives can assign the bond to a beneficiary of the estate.

Q. If segments of a bond are assigned to a Trust, is the assignment treated as a gift to a Trust so tax implications apply? i.e. 20% IHT charge if Discretionary Trust?

A. One of the key benefits of a bond is that an assignment by way of gift into trust does not trigger a chargeable event for income tax purposes. Whereas a gift of a directly held OEIC fund would be a disposal for capital gains tax purposes. Although holdover relief can be claimed if gifting into a discretionary trust.

For IHT purposes the gift will be a transfer of value so a PET or CLT for absolute and discretionary trusts respectively. If the value of the existing bond on the date of assignment into trust, combined with any other CLTs made by the settlor(s) exceeds their available NRB there would be an entry charge of 20% on the excess above the NRB.

Note, there is also a quirk in relation to the IHT reporting requirements when it involves an existing bond. If the value of the current transfer (i.e. the value of the bond) plus the cumulative total of all CLTs made by the transferor in the seven years preceding the current transfer exceeds 80% of the nil rate band (£260,000), the trustees will need to submit an IHT return even though there might be no IHT to pay.

Q. When trustees of a discretionary trust want to pass part of a bond to a person who is under 18, should the segments be assigned to a bare trust?

A. Assignment changes the legal ownership of the segments from the assignor (the trustees) to the assignee (the beneficiary). Where a beneficiary is a minor, problems can arise trying to assign segments as they don't have legal capacity to contract. Trustees would normally make an "absolute appointment" in favour of a minor if they wanted to distribute to them while making use of the beneficiary's allowances. We have a deed of appointment for our trust range on PruAdviser. 

Q. If not, how do we do this so we don't create a potential tax lability in the hands of the parent?

A. If the settlor(s) of the trust are the parent(s) of the intended unmarried minor beneficiary, then there is no way to avoid the parental settlement rules applying if the trustees realise the gain. This is the case whether it's an absolute or discretionary trust.

If the settlor(s)/parent(s) don't want to incur a tax liability then gains would need to be restricted to a level that won't result in additional tax (e.g. onshore bond gain that sits within their available basic rate band or offshore bond gain within their available starting rate and/or personal savings allowance).

Alternatively, they should avoid triggering a gain by taking withdrawals within the available 5% tax deferred allowance. "

Q. So can assign segments within disc trust to a bare trust?

A. The trustees of a discretionary trust can make absolute appointments of trust property in favour of one or more beneficiary. The appointed property is then held on bare trust for the appointed beneficiaries.

Q. Appointing segments - please can you give more detail - an example/case study

A. My colleague Graeme Robb provides a case study/example in this Professional Paraplanner article

Q. Please explain the tax implications of assigning a joint bond to Relevant Property Trust and the 7 year rule.

A. Assignment by way of gift of a bond into a relevant property trust will not cause a chargeable event however the bond owner(s) are making a gift for IHT purposes. If no exemption applies to the gift then it will be a chargeable lifetime transfer for IHT. The value of the gift will normally be the open market value of the policy which is usually the surrender value. Where the value of the gift, taking into account any other CLTs in the last 7 years exceeds the settlor's nil rate band, there will be an IHT entry charge of £20% on the excess (the tax charge is 25% if the settlor pays the tax rather than the trustees)

Q. Can an existing bond be placed into a DGT? I see most providers won't permit this but is it actually possible?

A. Normally a DGT is set up using cash rather than an existing bond. This is down to the provider involved and their new business requirements.

Q. What are benefits of offshore v onshore for most cases which route?

A.There’s no one size fits all and it will depend on each client scenario and ultimate objectives.

An onshore bond might be more appropriate where the person liable for the gain will be a basic rate taxpayer or higher when the gain is realised. This is because they will benefit from a 20% basic rate tax credit but it’s likely the tax incurred during the investment journey will be less than 20%. The investor will therefore only be liable for additional tax on any gain that sits in the higher rate when top-slicing relief (where applicable) doesn’t fully negate the higher rate liability.

Offshore bonds are generally suitable if the person liable is a non-taxpayer when the gain is realised. This means they can benefit from gross roll-up during the investment journey and then have the opportunity to crystallise gains with no tax to pay if the gain sits within available personal allowance, starting rate for savings and personal savings allowance. Therefore providing the ability to have a tax free journey and exit. If a basic or higher rate taxpayer invested in an onshore bond they are liable for tax on the full gain at their marginal rate (no 20% basic rate tax credit).

We will be covering the taxation of onshore and offshore bonds in the upcoming Bond School sessions, followed by a further discussion on this topic in our Techy Thursday webinar on 20 March 2025. In the meantime you should find the short case studies in our Why Bonds & OEICS guide helpful.

Q. Offshore will have more international equity exposure?

A. Not necessarily. The international equity exposure depends on the underlying fund rather than the wrapper itself.

Q. If joint bond is placed in trust and one of the policyholders passes away within 7 years; how is IHT calculated?

A. If a jointly owned bond is assigned into a trust then each settlor is making a gift for IHT. Normally the gift for each settlor will be half of the open market value of the policy (normally the surrender value). If one settlor dies within 7 years of the assignment their failed gift will be taken into account when working out any IHT on their estate.

Q. Could you walk through how the calculation is prepared for when a bond is cashed in half way through the 20 year term (10 year) and how the gain is calculated?

A. I will be covering bond gain calculations in session 003 of Bond School. However, to answer your question, 20 years might have been the expected investment horizon but it’s not a term as such.

If the bond is fully surrendered after 10 years you will use the formula for a final gain calculation which you can find in section 3 of our How to calculate insurance bond gains: Q&A article.

Q. What is the threshold where going offshore is better?

A. There is no threshold as such. With investment bonds, you need to consider when future chargeable events will arise, how much they might be, who they will be assessed on and what their tax position will be at that time. Where gains can be crystallised within the personal allowance, starting rate for savings and personal savings allowance, offshore bonds become more attractive from a tax perspective. 

Q. Hi, Can you suggest a Bond v OEIC comparison tool for compliance purposes

A. Our Tax Wrapper Comparison Tool on our Tech Matters site was designed for this purpose.

You would of course need your own compliance team to approve using our tool at your end.

Q. What’s the best way to set up a Bond for intergenerational wealth as part of IHT planning

A. There is no simple answer to this and it depends on who you want to be assessed on chargeable events and how the IHT planning is being carried out e.g. is the bond being assigned outright to an individual or a trust.

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