Chargeable event on death: the value is taken before death, not the payout

Death can be a chargeable event on an investment bond — but the figure that goes into the gain is not the cheque the family receives. It is the surrender value immediately before death. Miss that and the gain is overstated, because the death-benefit payout usually includes a small life-cover uplift the gain rules deliberately exclude.

The rule

The death of a life assured is a chargeable event where it gives rise to benefits under the policy (ITTOIA 2005 s.484(1); IPTM7390). On a single-life bond that is the death of the life assured; on a multiple-life “last survivor” bond it is the final death — a death before then is not the event. When the event arises, the value brought into the gain calculation is, by IPTM3515, the surrender value of the policy immediately before the death: the amount the insurer would have paid had the policy been surrendered the instant before. The actual death benefit — which on many bonds is 100.1% or 101% of the value, a token life cover — is not used.

A worked example

Illustrative figures (the death-value rule has no single HMRC pinned example, but the gain reproduces on the calculator by entering the surrender value before death as the surrender value): a bond with £100,000 of premiums, no prior withdrawals, standing at a £130,000 surrender value when the life assured dies, paying a £150,000 death benefit.

The gain is £30,000 — on the £130,000 value, not the £150,000 payout. Using the death benefit would manufacture a £50,000 gain and overstate the tax by the life-cover element the rules exclude.

The common error

Two recur. The first is taking the gain from the payoutrather than the surrender value immediately before death — overstating it by the life-cover top-up. The second is forgetting who is assessed: where the bond simply ends on death with no trust or assignment, the deceased's personal representatives are charged at the basic rate with no top-slicing relief, so the relief advisers reach for on a lifetime surrender is not available on a death in the estate. (Pension death benefits are an entirely separate regime — see pensions, death benefits and inheritance tax.)

Build the gain on the chargeable event gain calculator by entering the surrender value before death; if the certificate is in front of you, see how to read a chargeable event certificate.

ITTOIA 2005 s.484 · IPTM3515 (value on death) · IPTM7390 (death events)