The majority of British people are unaware that onshore bonds can help them avoid inheritance taxes Here's how

Two-thirds of people are unaware of bonds, despite the fact that they have a little-known benefit that can spare your loved ones from inheritance tax

Financial advisors say more people than ever are searching for ways to reduce the inheritance tax bills of their loved ones. However, one easy technique has been overlooked.

According to investment, protection, and retirement firm LV, a sizable portion of people (47 percent) anticipate transferring their wealth to future generations, with over a third (38 percent) aiming to do so directly to their children.

Many families, nevertheless, are still unsure of how to accomplish this while paying the least amount of inheritance tax.

Simultaneously, many people are looking for ways to avoid inheritance tax or at least lower their IHT bill due to significant changes to inheritance tax (IHT) introduced in the 2024 Autumn Budget, such as making defined contribution pensions liable for IHT starting in April 2027 and introducing new caps on business and agricultural immunity.

The use of onshore bonds is one remedy that is becoming more and more popular. These bonds are offered by UK-based companies and provide a straightforward and efficient means of increasing savings while minimizing the amount of taxes paid by the investor.

However, according to LV's research, over two-thirds (67%) of people are largely ignorant of the ways in which bonds can be used for tax mitigation and inheritance planning.

As more people seek to transfer their wealth, it is critical that they understand the financial planning resources available to them, stated Sarah Hills, director of wealth proposition at LV.

With their combination of tax efficiency, investment growth potential, and flexibility, onshore bonds are a great choice that can help clients leave a lasting financial legacy and prepare for later life.

What is the process for onshore bonds?

One way to invest and save money on taxes is through onshore bonds. Because onshore bonds are subject to the "chargeable event" regime, this is feasible. Therefore, gains are exempt from capital gains tax even though they might be subject to income tax.

Perhaps cashing in your bond is a chargeable event. Your tax-deferred allowance, on the other hand, allows you to take out up to 5% of your original investment (as capital repayments) annually without causing a chargeable event.

The so-called "top-slicing relief" kicks in when a chargeable event does happen. Instead of treating gains as taxable income for the current tax year, this enables gains to be taxed over the entire time invested. This may result in a lower tax rate for the entire gain.

Moreover, investors receive a 20 percent tax credit against their tax liability since an onshore bond is considered to have already paid basic-rate tax at 20 percent, even though in practice the bond will have paid less.

This implies that any gain that is subject to additional-rate tax after top-slicing will only result in a 25% income tax liability, higher-rate taxpayers will only pay a 20% income tax, and basic-rate and nil-rate gains will not be subject to any income tax obligations.

Benefits of offshore bonds for inheritance taxes.

Giving onshore bonds is one way to use them to get around inheritance tax. Family members may be assigned onshore bonds without incurring a chargeable gain. There is also no inheritance tax due as long as the giver lives for seven years.

The new owner will be eligible for full top-slicing relief and any unused 5 percent tax-deferred allowances on any future cash withdrawals from the bond since they will be treated as though they have owned it from the beginning.

Nonetheless, families are increasingly looking to onshore bonds that are written in trust for the inheritance tax benefit.

Putting an onshore bond into a discretionary trust is a gift that starts to shift the investment's value outside of your estate. Usually, the gift won't be included in your inheritance tax liability if you survive for seven years after it is given.

Through the trust, you can designate trustees who will determine how and when beneficiaries, like children or grandchildren, will receive payments from the onshore bond. If you want to lower the size of your taxable estate but are uncomfortable giving away large sums of money outright, this can be a good option.

Incorporating onshore bonds into a more comprehensive estate planning strategy can help reduce IHT and facilitate a more seamless and organized transfer of wealth between generations, according to experts.

Bonds and trusts are increasingly being used as strategies to lower IHT bills, according to wealth manager Quilter. While trusts allow clients to manage succession plans and ring-fence assets outside their estate for IHT purposes, bonds offer tax deferral and control.

According to internal data from Quilters, since the October 2024 Budget, financial adviser recommendations for onshore bonds have almost tripled.

According to LV's Hills, bonds are still a good choice, but it's obvious that more knowledge and instruction are needed to make sure customers are fully aware of their options and are able to make wise choices.