The tax could potentially apply to all of your Premium Bonds holdings
Martin Lewis has shared some thoughts on Premium Bonds(Image: ITV)
Premium Bond holders have been warned by Martin Lewis that their holdings and winnings could land a tax bill. He shared some thoughts on the savings scheme on the latest episode of his BBC podcast.
One question came in from a listener who wanted to know if their Premium Bonds could be subject to inheritance tax if they won a big prize. In response, Mr Lewis said: “Absolutely. Both the Premium Bonds that you own and any winnings from Premium Bonds are taxable for inheritance tax purposes, so would form part of your estate, yes.”
One perk of Premium Bonds is you receive all your prizes entirely tax-free, but were you to pass away, they would be part of your estate for inheritance tax purposes. Inheritance tax is levied at a standard rate of 40 per cent, on the total assets you pass on above certain allowances.
Continuing his answer, Mr Lewis said to look on the bright side even if your winnings could ultimately be hit by the 40 per cent levy. He said: “Inheritance tax is a maximum 40 per cent. If you won £1million the day before you were to pass away, and it were to all go straight into your estate, and you had other assets so you were over the thresholds, then 40 per cent would disappear, but it’d still be £600,000 up.”
You can typically pass on up to £325,000 in total assets without paying inheritance tax on this amount, plus another £175,000 if you are passing on your main home to a direct descendant. Some of the larger Premium Bonds prizes could push you towards these limits, as you can win amounts such as £50,000 and £100,000, as well as the £1million jackpot.
Tax applies to all your savings
Mr Lewis went on to clarify that “all forms of savings and investments” count towards valuing your estate for inheritance tax purposes. A key change is coming in next year around the inheritance tax rules.
From April 2027, unused pension pots will become liable for the tax. Pension funds are currently not considered part of your estate when calculating inheritance tax.
Common misunderstanding
Mr Lewis was also keen to dispel a myth about Premium Bonds. If you look at the top prize winners, it’s usually dominated by more recently purchased Bonds.
As such, people often think that these newer Bonds must have a better chance of winning. But Mr Lewis said this is not the case.
He said: “Many people think new Bonds win more often than old Bonds, and they’re right. And this is the reason why: there are more new Bonds than there are old Bonds.
“Each individual bond, whenever you bought it, has exactly the same chance of winning in Premium Bonds. It is a random lottery. The fact there are more new Bonds means new Bonds win more often.”
The odds of each £1 Bond winning is currently 21,000 to one, having improved from 22,000 to one from the September draw. The prize fund rate also went up then, improving from 3.8 per cent to 4.35 per cent.