A survey conducted by LV= in March 2025 found that 47 per cent of UK adults plan to pass on their wealth to future generations. Yet despite this intention, many are unclear about how to do so in a tax-efficient way. The same research found that over two-thirds of respondents — 67 per cent — were unaware that bonds can be used as part of an inheritance planning strategy.
That knowledge gap matters more than ever. Changes announced in the 2024 Autumn Budget have prompted many people to reassess their estate planning, and the forthcoming inclusion of defined contribution pensions in estates for IHT purposes from April 2027 is adding further urgency to these conversations.
Why IHT planning has become more pressing
The nil rate band — the threshold below which no IHT is charged — has been frozen at £325,000 since 2009 and is set to remain so until 2030. The residence nil rate band adds up to £175,000 for those passing a family home to direct descendants. Above these thresholds, the estate is taxed at 40 per cent.
Frozen thresholds combined with rising property values mean a growing number of families are finding themselves in IHT territory without having expected to be. The April 2027 pension changes, which will bring most defined contribution pension pots into the scope of IHT for the first time, are likely to significantly increase the taxable value of many estates.
What are onshore bonds?
An onshore bond is an investment wrapper offered by UK life assurance companies. Money invested within the bond grows in a tax-deferred environment: basic-rate tax has been paid within the fund, but there is no further income or capital gains tax liability until you make a withdrawal.
The bond can hold a range of underlying investments, offering growth potential alongside the tax-efficiency features built into the structure.
How onshore bonds can help with IHT planning
One of the most useful features of an onshore bond is the ability to transfer it to a family member without triggering a chargeable gain at the point of transfer. The recipient is treated as having held the bond from the outset, which means they can benefit from full top-slicing relief and any unused 5 per cent annual tax-deferred withdrawal allowance that has accumulated.
This flexibility makes bonds a practical tool for passing value across generations without an immediate tax charge.
Using trusts alongside bonds
When an onshore bond is placed within a trust, the planning benefits are enhanced further. The value of the bond sits outside the estate for IHT purposes once the relevant rules have been satisfied, while trustees retain access to the 5 per cent annual withdrawal allowance for expenses without incurring an immediate tax liability.
Structuring the bond as a cluster of individual policies gives trustees further flexibility — specific segments can be assigned to particular beneficiaries at appropriate times, aligning distributions with the needs of those individuals and managing the tax implications of each assignment.
Where bonds fit in a broader estate plan
Onshore bonds are not a standalone solution. They work best as part of a coordinated estate plan that also considers lifetime gifting strategies, the overall composition of the estate, pension arrangements and any trusts already in place.
The interactions between these different elements can be complex. How much of the annual gifting allowance has been used? How will the pension changes affect the taxable estate? Is a trust the most appropriate wrapper, and if so, what type? These questions require careful consideration before any action is taken.
It is also worth noting that tax planning and estate planning are not regulated by the Financial Conduct Authority, which is one reason why taking advice from a qualified independent adviser is particularly important in this area.
We help individuals and families across Worcestershire and Warwickshire navigate estate planning decisions, including the use of onshore bonds and trust structures as part of a wider strategy. If you would like to understand your options, we would be glad to discuss your situation.
The Financial Conduct Authority does not regulate tax or estate planning. Tax treatment depends on individual circumstances and may be subject to change. The value of investments can fall as well as rise. This article is for information only and does not constitute personal financial advice.