Martin Lewis has warned Premium Bond holders that their holdings and any prizes could be subject to inheritance tax. He shared his thoughts on the savings scheme during the latest episode of his BBC podcast, responding to a listener who asked whether Premium Bonds could be liable for inheritance tax after a big win.
Tax applies to your estate
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."
While Premium Bonds prizes are normally received tax-free, if you pass away they become part of your estate for inheritance tax purposes. Inheritance tax is charged at a standard rate of 40 per cent on the total assets you pass on above certain allowances.
What the 40 per cent levy means
Mr Lewis added: "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, plus another £175,000 if you are passing on your main home to a direct descendant. Larger Premium Bonds prizes, such as £50,000, £100,000, and the £1million jackpot, could push you toward these limits.
All savings count
Mr Lewis clarified that "all forms of savings and investments" count toward valuing your estate for inheritance tax. From April 2027, unused pension pots will also become liable for the tax, as pension funds are currently not considered part of your estate.
Why newer Bonds appear to win more
Mr Lewis also addressed a common misunderstanding. Many people notice that top prize winners are usually dominated by more recently purchased Bonds and assume these have a better chance of winning. He said this is not the case.
He explained: "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 are currently 21,000 to one, having improved from 22,000 to one from the September draw. The prize fund rate also rose, from 3.8 per cent to 4.35 per cent.
