Investment Bonds and Inheritance Tax: A Guide for UK Expats

This distinction has become more important since the UK changed its inheritance tax rules on 6 April 2025. Whether foreign assets fall within the UK IHT net now depends largely on an individual’s history of UK residence. For some expatriates, this means an offshore investment bond can remain within their estate for UK IHT purposes even after they have left the UK.

The way a bond is owned can also affect the position. Holding a bond personally, assigning individual segments or placing it into an appropriate trust can produce different inheritance tax and income tax consequences. Any planning therefore needs to consider the bond alongside your residence status and the amount of access you need to retain to the capital.

This article explains how investment bonds and inheritance tax interact, how the residence-based IHT rules affect UK expatriates, and the planning options that may be available to bondholders.

Are Investment Bonds Subject to Inheritance Tax?

Investment bonds are generally subject to UK inheritance tax (IHT) when held directly in your own name and you are within the scope of UK IHT on the relevant assets at the time of your death. The provider’s jurisdiction does not, by itself, determine whether a bond is subject to IHT, so the bond’s offshore nature does not automatically exempt it from UK taxation.

Rather than simply where the provider is based, the bond’s IHT treatment depends on factors including its ownership structure, the investor’s long-term UK residence status and, where relevant, the situs of the policy. For a long-term UK resident, both onshore and offshore bonds can fall within the UK IHT net. For someone who is not a long-term UK resident, the situs of the policy can still be relevant in determining whether it is within the scope of UK IHT.

A bond can be a valuable estate planning tool to reduce potential liabilities when utilised appropriately. Investment bonds offer tax-deferral and planning opportunities, but they should not be confused with IHT exemptions.

To understand this relationship, you should familiarise yourself with the general IHT rules affecting expats.

How the Current IHT Regime Impacts UK Expats

The IHT regime fundamentally changed in April 2025 by introducing three critical considerations for UK expats:

1. Long-term residence
2. The IHT tail period
3. Excluded property rules

Long-Term Residence

On 6 April 2025, the UK replaced domicile and deemed domicile as the main tests determining the IHT treatment of foreign assets with a residence-based regime. Consequently, whether overseas assets fall within the UK IHT net is now primarily determined by the amount of time you have spent as a UK resident, rather than domicile under the previous system.

Under the new regime, you are generally considered a long-term UK resident (LTR) if you have been a UK resident for at least ten of the previous 20 tax years. This is different from the former 15-of-20 deemed-domicile test, although under the previous regime an individual could also have been UK domiciled under general law without meeting that test.

If you are considered a long-term UK resident, your worldwide assets (including offshore bonds) may be subject to IHT. Importantly for expats, becoming non-UK resident under the statutory residence test does not necessarily end this exposure immediately.

There are also transitional rules for some people who left the UK before the new regime took effect. For example, specific rules apply to certain individuals who were not UK domiciled under general law on 30 October 2024 and were non-UK residents from 6 April 2025. This means that historic residence and domicile circumstances may still need to be considered when establishing an expat’s current IHT position.

The IHT Tail Period

Although it is possible to cease being a long-term UK resident after relocating, you may not do so immediately. Rather, you can remain subject to a tail period during which your worldwide assets remain within the scope of UK IHT.

For someone who has been a UK resident for between 10 and 19 of the previous 20 tax years, the period generally increases according to their previous years of UK residence. For instance:

The tail period warrants diligent residence planning for expats with LTR status. Simply leaving the UK does not necessarily remove investment bonds or other overseas assets from the UK IHT net immediately.

The precise position can also depend on transitional rules. For example, certain individuals who were deemed UK domiciled on 30 October 2024 but became non-UK resident from 6 April 2025 can cease to be long-term UK resident after three years of non-residence.

Excluded Property Rules

Under the residence-based regime, the “excluded property” status of overseas assets held within a trust is no longer permanently fixed by the settlor’s domicile when the assets are settled.

For many trusts with a living settlor, the broad position is:

The position is more complex where the settlor has died or where there is a qualifying interest in possession. Transitional provisions can also apply to property that was already held in trust on 30 October 2024.

Where foreign trust assets are not excluded property, they may fall within the UK relevant property regime, potentially giving rise to:

• Lifetime entry charges in relevant circumstances
• 10-year periodic anniversary charges
• Exit charges

Gifting behaviour around the point of departure also requires care. Whether a lifetime transfer remains relevant for IHT depends on the donor’s long-term residence status, the nature and timing of the transfer, and the type and situs of the property involved.

These changes fundamentally affect some of the traditional strategies available to expats with foreign assets, which is why professional guidance is highly recommended. Our financial advisers at Titan Wealth International can assess your residency status to help you understand your obligations and suggest tax-planning strategies aligned with the LTR regime.

How Are Investment Bonds Taxed Under the Chargeable Event Regime?

In addition to IHT exposure, investment bonds are subject to a specific income tax framework known as the chargeable event regime. Three events interact closely with tax planning decisions:

1. Encashment (surrender)
2. Death
3. Assignment

Encashment (Surrender)

Surrendering a bond can produce a chargeable gain. The amount taxed and the event date primarily depend on the surrender type:

The 5% facility is a tax deferral rather than an exemption. Tax that is not charged when a withdrawal is made can effectively be deferred until a later chargeable event.

Where a substantial gain arises, you may be able to utilise top-slicing relief (TSR). TSR recognises that a gain may have accumulated over several years but become taxable in a single tax year. The full chargeable event gain remains part of the income tax calculation, while an annual equivalent or “slice” is used in a separate calculation to determine the relief available.

TSR is only available to individual investors. It is not available for companies, trustees or personal representatives.

The tax treatment can also differ between UK and offshore policies. For example, individuals and trustees liable on gains from UK policies are generally treated as having paid basic-rate tax on the gain, whereas offshore policies do not generally carry the same UK basic-rate tax credit.

Death

For a life assurance bond, the death of the last relevant life assured generally brings the bond to an end and can crystallise a chargeable event gain. The gain may be assessed as income of the deceased for the tax year of death.

If there are additional lives assured and no benefits become payable on the holder’s death, the bond may continue. The Legal Personal Representatives (LPRs) may then decide to fully encash the bond or assign ownership of it to beneficiaries.

Capital redemption bonds operate differently because they do not depend on the death of a life assured and therefore do not have a death chargeable event.

If a bond is held in a trust, the person liable for a chargeable event gain depends on the type of trust, the circumstances of the settlor and the event concerned. The settlor can be liable in some circumstances, while trustees or beneficiaries can be liable in others.

Assignment

Assignments enable you to transfer the legal and beneficial ownership of a bond or individual policies within it. The tax treatment primarily depends on the circumstances under which the transfer happens, with two common scenarios:

1. Assignment for money: A whole assignment of beneficial ownership for money or money’s worth, such as a sale of the policy, will normally create a chargeable event.
2. Assignment for no value: A whole assignment by way of gift does not normally produce an immediate chargeable event. The new owner may instead become liable when a later chargeable event occurs.

Special rules apply to divorce and dissolution. Where a policy is transferred under a relevant court order, or an agreement is formally ratified by the court, HMRC does not normally treat the assignment as being for money or money’s worth for these purposes.

Assignments between spouses or civil partners living together are specifically disregarded for chargeable-event purposes. This can allow ownership to be transferred before a later encashment, at which point the recipient’s own tax position may be relevant. Different rules can apply where spouses or civil partners have separated.

Assignments can also facilitate tax-efficient succession. Rather than the LPRs encashing a continuing bond, it may be possible to assign ownership to the ultimate beneficiaries before they decide when to encash it.

How To Utilise Investment Bonds for IHT Planning

IHT mitigation involving bonds is achieved by the bond’s ownership and structure rather than its features. You may utilise several techniques, most notably:

1. Writing bonds into a trust
2. Gifting bond segments
3. Utilising trust-based gifting structures
4. Utilising the 5% withdrawal allowance

Writing Bonds Into a Trust

Placing a bond into an appropriately structured trust can shift some or all of its value or future growth outside your personal estate. Whether it does so, and when, depends on the trust structure, the nature of the transfer and whether you retain any benefit from the assets.

A bond does not automatically become exempt once you write it into a trust. The IHT consequences also differ according to the type of trust.

For example, an outright gift to another individual will generally be a Potentially Exempt Transfer (PET). If the donor survives for seven years after making the gift, the transfer generally becomes exempt from IHT.

By contrast, a lifetime transfer into an ordinary discretionary or relevant property trust is generally an immediately chargeable lifetime transfer rather than a PET. Subject to available exemptions and the nil-rate band, an IHT charge can therefore arise when the trust is established, with further relevant property charges potentially applying later.

If a PET becomes chargeable because the donor dies within seven years, taper relief may reduce the tax attributable to the gift once more than three years have passed. It does not reduce the value of the gift itself.

If the gift is wholly covered by the available nil-rate band, there may be no tax on the gift itself for taper relief to reduce, although the gift can still use some or all of the nil-rate band available against the estate.

Gifting Bond Segments

Investment bonds are typically issued as a cluster of identical policies (e.g., 1,000 equal segments). If this is the case with your bond, you may gift some of its segments to reduce the IHT liability.

That is generally done by assigning complete policy segments as an outright, unconditional gift. A whole assignment by way of gift will not normally create an immediate chargeable event for income tax purposes. Alternatively, you may utilise a trust to retain control over when and how beneficiaries receive assets, although the IHT treatment will depend on the trust used.

The gifting process is relatively straightforward:

1. Verify that the bond is segmented.
2. Contact your bond provider or financial platform to confirm its assignment requirements.
3. Clearly state which specific policy segments (e.g., 100 segments out of 1,000) are being gifted, provide details of the new owner, and complete the provider’s required documentation.

When gifting bond segments, it is critical to understand and follow the applicable anti-avoidance rules. For an outright gift to remove an asset from your estate, you generally cannot continue to enjoy or benefit from the property you have given away. Otherwise, the gift with reservation rules may apply.

Utilising Trust-Based Gifting Structures

If you wish to utilise trusts to hold a bond or its segments, three commonly used structures are:

1. Gift trusts
2. Discounted gift trusts
3. Loan trusts

A standard gift trust can be suitable when you wish to give away capital that you will not need to access again. However, the IHT treatment depends on the type of trust used. A transfer to an ordinary discretionary or relevant property trust is generally an immediately chargeable lifetime transfer, while an outright gift or transfer into certain other qualifying structures may be treated differently.

A complete abandonment of benefits in the gifted assets is a critical consideration. If you give assets away but retain the ability to benefit from the gifted property, the Gift with Reservation of Benefits rules may bring the property back within your estate.

A discounted gift trust works differently because specific rights to future capital payments are retained from the outset, while the remaining rights are gifted. The value of those retained rights is taken into account when valuing the transfer for IHT purposes. Provided the arrangement is structured correctly, the retained rights do not in themselves amount to a reservation of benefit in the property that has been given away.

If you are unwilling to give up access to your original capital, you may select a loan trust. Rather than gifting the main investment amount, you make an interest-free loan to the trustees, who then utilise this loan to purchase an investment bond.

Under a typical loan trust, the loan is repayable to you under its terms. At the same time, investment growth above the outstanding loan can accrue for the trust beneficiaries rather than increasing the value of the loan remaining in your estate. Any outstanding amount owed back to you remains an asset of your estate.

Utilising The 5% Withdrawal Allowance

HMRC’s rules broadly provide a cumulative tax-deferred withdrawal amount equal to 5% of the premiums paid for each policy year, until the total reaches 100% of those premiums. Unused amounts can generally be carried forward.

Despite being widely called the “5% allowance”, it is a tax-deferral mechanism rather than a tax exemption. Withdrawals within the available amount can postpone a chargeable event gain, but they are taken into account when a later gain is calculated.

When combined with trusts in long-term planning, this tax-deferred facility can help manage cash flow alongside estate planning.

The specific interaction between the 5% allowance and the trust will depend primarily on the trust’s structure. For instance, in a loan trust, trustees may use partial withdrawals from the bond to make repayments against the outstanding loan. Those repayments reduce the amount owed to the settlor, while growth remaining within the trust can accrue outside the value of that outstanding loan.

When Can Investment Bonds Be Utilised for IHT Planning?

One scenario in which investment bonds may be suitable for IHT planning is when an estate is likely to exceed the available nil-rate bands.

For the 2026/27 tax year, these can include:

1. The £325,000 nil-rate band
2. The additional £175,000 residence nil-rate band where a qualifying residence passes to direct descendants

The residence nil-rate band is not available to every estate. It applies where the relevant conditions are met and begins to taper away where the estate exceeds £2 million. Unused nil-rate band and residence nil-rate band can also, subject to the rules, be transferred to a surviving spouse or civil partner. This means the available thresholds should be assessed for the individual estate rather than simply assuming a £500,000 limit.

If an estate remains comfortably below the relevant available thresholds, bond-based trust planning may add complexity without a corresponding IHT benefit.

If you plan on utilising investment bonds to optimise IHT, ensuring sufficient time for potentially exempt transfers to operate can be critical where the planning involves a PET. Ideally, the donor should survive for the full seven years after making such a gift so that the PET becomes exempt from IHT. Taper relief may reduce tax attributable to a chargeable lifetime gift after three years, but it should not be understood as reducing the value of the gift itself.

Transfers into relevant property trusts operate differently because they can be immediately chargeable lifetime transfers rather than PETs.

Finally, investment bonds may be suitable where you can accept reduced access to capital in exchange for potential estate-planning benefits. If you anticipate a need for significant capital flexibility, you may wish to consider structures such as loan trusts or avoid making an outright gift.

For expats, the UK treatment is only one part of the position. A trust, assignment, withdrawal or succession arrangement that works for UK tax purposes may be treated differently in the country where you live or hold assets. Local tax, succession and reporting rules therefore need to be considered alongside the UK position.