In a recent PCD podcast, David Bell spoke with Dhana Sabanathan, Partner and Head of the Private Client team at Michelmores LLP, and Adam Canavan, Financial Planner at Bowmore Financial Planning, about the role of investment bonds within discretionary trusts. Their case study — the Morrison Family Trust, holding £2.8 million across several offshore bonds — is fictional, but the planning considerations it raises are ones advisers and trustees encounter across the private wealth market.

Not What the Name Suggests

Despite the name, an investment bond has nothing to do with fixed income. It is an insurance-based investment wrapper — and for discretionary trusts with a long-term horizon, it is one of the most flexible and tax-efficient structures available. Understanding why requires unpacking three features that make bonds particularly well-suited to the trust context.

The first is administrative simplicity. Investment bonds are deemed non-income producing by HMRC, which means the trust does not automatically generate an annual tax reporting obligation simply by holding one. For trustees managing complex family structures, that matters.

The second is tax-efficient growth. Investments within the bond grow on a gross roll-up basis — sheltered from income tax and capital gains tax while they remain inside the structure. Over the kind of long time horizons that characterise multi-generational trusts, the compounding effect of that sheltered growth can be substantial.

The third — and most useful for distribution planning — is segmentation. A bond can be broken into individual parts, known as segments. Trustees can assign segments directly to beneficiaries rather than surrendering the bond and distributing cash.

A beneficiary who is in the basic rate band, or not yet earning significantly, may pay a fraction of what the trust itself would pay on the same gain. Top-slicing relief — which effectively spreads a chargeable gain across the years the bond has been held — can reduce the liability further still.

The 5% Allowance: Rolled Over, Not Lost

One of the most powerful and frequently underused features of investment bonds in a trust is the 5% annual tax-deferred withdrawal allowance. Each year, trustees can withdraw up to 5% of the original capital invested without triggering an immediate tax charge. And crucially, if that allowance is not used in a given year, it rolls over.

For the Morrison Trust, with beneficiaries' children still some years from school age, unused 5% allowances accumulate year by year. By the time fees become payable, a substantial tax-deferred reserve may be available — enough to fund multiple years of distributions with minimal immediate tax impact.

In practice, trustees tend to favour taking regular, modest withdrawals aligned to fee timings, rather than a single large lump sum. This keeps more of the investment compounding within the tax-efficient environment of the bond, and provides greater certainty around the annual cost of distributions.

The Trustees' Duty: Review, Don't Just Hold

Trustees have a legal duty to monitor the performance of trust-held investments. They are not expected to be investment experts — but they are expected to take professional advice, review financial statements, and act when performance is persistently poor. Holding a poorly performing bond indefinitely, in the hope that things will improve, is not a defensible position.

A financial planner adds real value here. Bond paperwork is not written with lay readers in mind. Understanding what it would cost to exit, what the consequences of switching investment managers would be, and whether the underlying fee structure remains competitive — these are things an experienced adviser can assess quickly, and trustees often cannot.

Succession, Wind-Up, and the End of the Trust

Offshore bonds are long-term instruments. But trusts — like all structures — eventually reach a point where the question of continuation versus wind-up must be asked honestly. Ongoing administration costs are real and rising. If the trust fund has reduced in size, or if the original multi-generational purpose has largely been achieved, the cost-benefit calculation may shift.

Trustees do not need beneficiary agreement to wind up a trust — but they need strong evidence that it is the right outcome, and ideally they will have brought beneficiaries into the conversation before reaching that point. Transparency matters: beneficiaries who understand how the structure works, why decisions are being made, and what the long-term plan looks like are far less likely to challenge those decisions later.

Starting the Conversation Early

Both Sabanathan and Canavan are advocates for early financial education for younger beneficiaries — not necessarily disclosing the full picture at a young age, but introducing the concepts. Charitable structures or donor-advised funds offer a useful entry point: letting children think about how to grow a pot of money for a cause they care about, without making it personally about the family's wealth.

By the time those beneficiaries start receiving distributions — whether from bond segments, cash, or other trust assets — they should already have a framework for thinking about wealth, not be encountering it for the first time. That shift, from a windfall mentality to a foundation mentality, is what separates the beneficiaries who use trust assets well from those who don't.

The investment bond, used thoughtfully, is not a complexity for its own sake. It is a vehicle that allows trustees to hold, grow, and distribute significant assets across decades — and to do so in a way that minimises unnecessary tax, respects fiduciary obligations, and serves the generations the trust was always meant to benefit.

Dhana Sabanathan is Partner and Head of the Private Client team at Michelmores LLP, where she advises trustees, beneficiaries, business owners, and family offices on tax, trust, and estate planning. Adam Canavan is a Financial Planner at Bowmore Financial Planning, working with high net worth clients and their families to grow, preserve, and structure their wealth.

Michelmores LLP is a Limited Liability Partnership, authorised and regulated by the Solicitors Regulation Authority (SRA authorisation number 463401) and is not authorised by the Financial Conduct Authority. This podcast is for general information purposes only and does not constitute legal, financial, tax or other professional advice and should not be relied upon as a substitute for independent professional advice tailored to your circumstances. Any commentary on financial matters does not constitute financial promotion or investment advice. Any examples or scenarios are illustrative only.

Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Bowmore does not provide tax advice. Some areas discussed, such as estate planning, cash‑flow planning, and inheritance tax planning, are not regulated by the Financial Conduct Authority (FCA). Tax treatment depends on individual circumstances and may change in the future, including the tax position of specific products or wrappers. The discussion is for general guidance only and does not constitute personalised advice. Bowmore Financial Planning Ltd contributed to this discussion as an independent participant, sharing general insights alongside other professionals.