Gifting £50,000 in Premium Bonds to four grandkids to bypass taxes?
In the quest to pass on a surplus amount of cash tax-free, many individuals are considering purchasing Premium Bonds for their loved ones. However, it's important to understand that Premium Bonds are not exempt from Inheritance Tax (IHT).
Although the prizes from Premium Bonds are tax-free income, the capital invested forms part of your estate and may be subject to up to 40% IHT if the estate exceeds the tax-free threshold of £325,000 per person, plus any additional residence nil-rate band.
To pass on wealth via Premium Bonds while considering IHT rules and exemptions, you should consider the following strategies:
- Gifting Premium Bonds during your lifetime: Utilise annual gift allowances (£3,000 per year) and other exemptions to reduce the value of your estate. Gifts made more than seven years before your death are generally exempt from IHT.
- Use of the nil-rate band exemption: Each individual has a £325,000 tax-free threshold, plus an additional £175,000 residence nil-rate band if you pass on a main residence to direct descendants. Planning to utilise these allowances can reduce IHT liability on your estate including Premium Bonds.
- Holding Premium Bonds in trust: Putting Premium Bonds into a trust can allow the bonds (and future prizes) to be passed on outside your estate, potentially avoiding IHT. However, trusts have their own complex tax rules and may incur charges, so professional advice is recommended.
- Consider inflation and prize uncertainty: Premium Bonds do not pay interest, only tax-free prizes through a lottery; most holders win little or nothing, and the capital may lose value in real terms. This may impact the actual wealth transferred.
It's worth noting that there is no upper limit on the amount of gifting that can be made under the Gifting from Income rules. The only exemption for passing on money tax-free is the £3,000 gifting rule, or gifts out of surplus income.
When it comes to Premium Bonds, the maximum amount that can be gifted per child is £50,000. Premium Bonds must be held by individuals under 16 and must be held in their name via a parent or legal guardian. The gifted value of Premium Bonds does not immediately remove it from the individual's estate.
To qualify as a gift from income, the gifts must form part of a regular pattern of the gift-giver's payments, and there needs to be evidence of this (e.g. a standing order). Single, one-off gifts may still qualify if they can be seen as part of a regular pattern.
Incorporating modest Premium Bond gifts with structured use of Isas, pensions, or trusts may provide a better long-term strategy for intergenerational planning.
In conclusion, while Premium Bond prizes are tax-free income, the capital invested is subject to IHT as part of your estate. To pass tax-free wealth to relatives using Premium Bonds, gifting strategies during life and trust arrangements aligned with the £325,000 nil-rate band and other allowances should be considered alongside professional estate planning advice.
[1] GOV.UK - Inheritance Tax [2] HMRC - Gifts you can make during your lifetime [3] Money Saving Expert - Inheritance Tax [4] GOV.UK - Trusts and estates [5] GOV.UK - Premium Bonds [6] GOV.UK - Individual Savings Account (ISA) [7] GOV.UK - Pension schemes [8] GOV.UK - Discounted Gift Trusts
- To minimize the impact of Inheritance Tax (IHT) on a surplus amount of cash, consider investing in personal-finance products like Premium Bonds, but also consider strategies such as gifting a portion of the investment during one's lifetime to reduce the value of one's estate.
- For a comprehensive wealth-management plan, consider incorporating instruments like Isas, pensions, and trusts in addition to Premium Bonds, in order to provide a more robust long-term strategy for intergenerational wealth transfer.
- When implementing estate planning strategies involving Premium Bonds, remember to take advantage of exemptions like the £3,000 annual gift allowance, as well as utilizing the nil-rate band exemptions and other relevant allowances to minimize IHT liability.
