Are Premium Bonds Subject to Inheritance Tax?

November 20, 2025

Premium Bonds are a popular way to save, but many people are unsure how they fit into their estate planning. With Inheritance Tax potentially taking a significant portion of your assets, it’s crucial to understand where your Premium Bonds stand.

This guide will explain how Premium Bonds are treated for Inheritance Tax (IHT) purposes and what steps you can take to manage your estate effectively, helping you make informed decisions to protect your wealth for future generations.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate of a person who has died. A person’s estate includes everything they own, like their property, money, and personal belongings.

Currently, the first £325,000 of a person’s estate is exempt from IHT. This is known as the ‘nil-rate band’. If you are leaving property of this value to direct lineal descendants and your estate is worth less than £2,000,000 you will also have another £175,000 allowance known as the ‘residence nil-rate-band’. Any value above this threshold is typically taxed at 40%. For married couples and civil partners, it’s often possible to combine allowances, potentially allowing up to £1,000,000 to be passed on tax-free. It is important to remember that leaving Bequests of an entire estate to a spouse, civil partner, or a registered charity typically qualify for an exemption from Inheritance Tax.

What are Premium Bonds?

Premium Bonds are a savings account from National Savings & Investments (NS&I). They are backed by the UK government’s Treasury. Instead of earning regular interest, holding Premium Bonds qualifies you for a monthly prize draw for tax-free cash prizes. This unique feature, combined with their government-backed security, makes them an attractive option for many UK savers.

Are Premium Bonds Subject to Inheritance Tax?

This is a common question, and the answer is straightforward: yes, Premium Bonds are subject to Inheritance Tax.

Although any prizes you win from Premium Bonds are tax-free, the bonds themselves are not exempt from IHT. When a person dies, the total value of their Premium Bonds is added to their estate. If the total value of the estate exceeds the IHT threshold, the bonds will be included in the calculation for the 40% tax. For IHT purposes, Premium Bonds are valued at their face value—the amount initially paid for them.

So, if someone held £50,000 in Premium Bonds, that full amount would be included in their estate.

Effective Estate Planning Strategies

. To ensure the efficient transfer of your wealth, consider the following:

• Make an up-to-date Will: A Will is the only way to guarantee your assets, including Premium Bonds, are distributed according to your wishes. Without one, the rules of intestacy apply, which may not align with what you intended.
• Utilise Gifting Allowances: You can gift up to £3,000 each tax year without it being added to the value of your estate. This is known as your “annual exemption.”
• Leave a Legacy to Charity: Any gifts made to a registered charity in your Will are exempt from Inheritance Tax. Should you bequeath a minimum of 10% of your net estate to a qualifying charity, the inheritance tax (IHT) rate applied to the remaining portion of your estate may be lowered from 40% to 36%.

Your Next Steps

Understanding how Inheritance Tax affects your assets, including Premium Bonds, is the first step towards effective estate planning. While the rules can seem complex, taking action now can provide peace of mind and protect your loved ones from a significant tax burden in the future. Seeking professional advice is crucial to navigate the legal and financial complexities involved.

Rated Excellent on Reviewsolicitors with over 390 client reviews and based in the heart of Gloucester, Tayntons is here to help. Our experienced solicitors specialise in wills, trusts, and estate planning, providing clear, client-focused guidance tailored to your individual circumstances.

Get in touch with our team to learn more about our Wills, Trusts & Powers of Attorney service and discover how we can support you.

Call us on 01452 522047, email info@tayntons.co.uk, or request a callback through our website.