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A date with destiny for bond values

It is probably fair to say that most advisers would claim to have a pretty good grasp of the taxation regime that applies to single-premium bonds. After all, it has been around for many years and the concept of 5 per cent tax-deferred withdrawals, top-slicing relief and the impact of withdrawals in excess of 5 per cent or full policy encashments on the availability of age allowance for clients aged 65 and over should be well known.

However, one area that still seems to cause problems is that involving the valuation of such policies on death. On the face of it, this should be simple enough but the reality is sometimes very different.

The amount payable in the event of a death claim under a single-premium bond is set out in the terms of the policy. This will usually be 101 per cent of the bid value of the units but there are differences between various life offices as to how the relevant price is determined and this is where the precise policy wording is very important.

Some life offices use the unit price at the valuation immediately following the date of death but others will calculate the death benefit by using the unit price calculated at the valuation immediately after the life office receives notification of the death.

It can be seen that, if this second basis is utilised, things may start to become confusing as one amount will be used to determine the value of the bond for inheritance tax purposes on death and a different amount will be used to calculate the chargeable gain for income tax purposes.

For a single-life policy, where the owner and the life assured are the same person, the different values are broadly as follows:

Inheritance tax

The amount to be included in the deceased&#39s estate for IHT purposes is the value of the bond on death, that is, the bid value of the units on the date of death multiplied by 101 per cent if applicable.

This is in accordance with section 171 of the Inheritance Tax Act 1984 which reads: “In determining the value of a person&#39s estate immediately before his death, changes in the value of his estate which have occurred by reason of the death … shall be taken into account as if they occurred before the death.”

The 1 per cent enhancement therefore applies for these purposes as it is payable by reason of the death.

Income tax

The chargeable gain for income tax purposes is based on “the surrender value of the policy immediately before the death” in accordance with section 541(1)(a) of the Income and Corporation Taxes Act 1988.

This is the bid value of the units on the date of death, not enhanced by 101 per cent but reduced by any early surrender penalties or market value reductions because the surrender value is used, not the claim value.

There are no provisions in the legislation for taxing any increase in the value of the policy between the date of death and the date the life office receives notification of death.

For example, let us assume the bid value of units under a policy were as follows:

October 1, 2001 – £10,000

October 2, 2001 – £10,100

October 3, 2001 – £10,200

October 4, 2001 – £10,300

October 5, 2001 – £10,400

The amount payable on death is 101 per cent of the bid value of the units on the day after receipt of notification of death. Mr J Bond died on October 2, 2001. The life office received notification of the death on October 4, 2001.

The amount payable under the policy is (101 per cent x £10,400) = £10,504.

The amount to be included in Bond&#39s estate for inheritance tax purposes is (101 per cent x £10,100) = £10,201.

The amount on which the chargeable gain for income tax purposes is based is £10,100.

Any amount payable by reason of the 1 per cent enhancement is not subject to income tax and there is no provision for a tax charge on the difference between the bid value of the units on notification of death (£10,400) and the amount on which the chargeable gain is based (£10,100).

So there it is – not quite as simple as one might think. One final point to bear in mind is that these figures do not take account of any interest which might be added as a result of the life office delaying payment of the claim.


Insight Investments – Insight Investments UK High Yield

Tuesday, 22 October 2002 Type: Oeic Aim: Income by investing in high yield fixed and variable rate securities Minimum investment: Lump sum £2,000, monthly £100 Investment split: 100% in high yield fixed and variable rate securities Isa link: Yes Pep transfers: Yes Charges: Initial 5.25%, annual 1.15% Commission: Initial 3%, renewal 0.5% Tel: 0845 8506050

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