Millions of Britons with Premium Bonds could be facing an unexpected tax bill on their winnings due to a little-known rule change by HM Revenue & Customs (HMRC).
The popular savings product, run by National Savings and Investments (NS&I), is famous for its tax-free prize draws. However, a shift in how HMRC treats these wins could see some savers losing a portion of their cash to the taxman.
The Hidden Tax Trap for Savers
While Premium Bonds prizes themselves remain free from Income Tax and Capital Gains Tax, they are not automatically shielded from other taxes. The crucial change involves how these wins are treated for inheritance tax (IHT) purposes after the saver's death.
HMRC now considers the full value of the Premium Bonds holding as part of the deceased's estate. This means that if the total estate value, including the bonds, exceeds the IHT threshold—currently frozen at £325,000—the winnings could be subject to a hefty 40% tax.
Who Could Be Affected?
This change primarily impacts:
- Elderly savers with substantial Premium Bonds holdings
- Families where the total estate value is near or above the IHT threshold
- Those who have accumulated significant winnings over many years
With the IHT threshold frozen until at least 2028 and bond values growing, more families could be pulled into the tax net through 'fiscal drag'.
How to Protect Your Premium Bonds Winnings
Financial experts recommend several strategies to mitigate this potential tax hit:
- Consider gifting bonds to family members more than seven years before your death to potentially remove them from your estate
- Review your total estate value regularly, including all savings, property, and investments
- Seek professional financial advice on estate planning and IHT mitigation strategies
While Premium Bonds remain a popular and secure savings option for many, this HMRC rule change serves as a crucial reminder that no investment is entirely free from the taxman's reach. Savers should stay informed and plan accordingly to protect their hard-earned winnings for future generations.
