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Tax Planning (Inheritance Tax)

Our Client

David G. had been assigned an Investment Bond by his parents. His Father was the only life assured, meaning should he pass away, the Bond would mature, realising sizeable taxable gains.

We advised that part of the Bond should first be assigned to his wife, Sarah, to ensure that should the Bond mature, her tax allowances could also be used. We then suggested a part-surrender of the Bond, whilst using the proceeds to make pension contributions, to keep total taxable incomes under the higher rate tax threshold in the first instance, including the chargeable gain from the part-surrender of the Bond. This ensured that no higher rate income tax or high-income Child Benefit Tax Charge would be payable. 


Taking into account unused annual allowances from previous years (using ‘carry forward’ rules and available savings), we further recommended additional pension contributions to bring total taxable income down to as close to zero as possible, thereby leaving all allowances available for the chargeable gain. 

David and Sarah’s combined net worth exceeds the inheritance tax nil rate bands and whilst pensions are an excellent form of long-term investing, they are currently deemed outside of the estate for inheritance tax purposes. The Bond had been set up in the first instance such that David’s parents could mitigate their own inheritance tax and pass monies to their children. By making pension contributions, this legacy can continue. 

The provisional plan was to complete the same exercise in the next tax year and beyond until such time as the Bond is fully encashed with maximum tax efficiency. 

 Tax Planning

The tax on the part-surrender of the Bond was very low and both David and Sarah received tax relief on most of their income: 

  • David’s Tax Saving: £27k 
  • Sarah’s Tax Saving: £10k 
  • Total combined gross pension contributions: Approximately £100k  

Inheritance Tax savings The Bond value was £225k when assigned to David, with a part assignment taking place to Sarah, £90k was surrendered between them, with the full proceeds contributed to their pensions, resulting in further tax savings of £36k. 


Both David and Sarah were able to save £37k through efficient tax planning with further savings of £36k through Inheritance Tax Planning.  

Giving a total potential tax saving of £73k in the 2020/21 tax year, with more to follow in the ensuing years.