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Premium Bonds

Also known as: NS&I Premium Bonds, Prize Bonds

Definition

Premium Bonds are a UK government savings product where each £1 invested receives a unique number entered into monthly prize draws for tax-free cash prizes instead of earning interest, with your capital guaranteed and accessible anytime.

Understanding Premium Bonds matters for estate planning because they're included in your estate at face value for Inheritance Tax calculations and cannot be transferred directly to beneficiaries.

What Do Premium Bonds Mean?

Premium Bonds are issued by NS&I (National Savings & Investments), an executive agency of HM Treasury, making them 100% secure and backed by the UK government. Each £1 bond receives a unique number entered into monthly prize draws run by ERNIE (Electronic Random Number Indicator Equipment), a quantum-powered random number generator. Prizes range from £25 to £1 million, and all winnings are completely tax-free—exempt from both Income Tax and Capital Gains Tax. Instead of earning interest, bondholders have the chance to win prizes funded by an annual prize fund rate, currently 3.60% as of August 2025, with odds of winning any prize at 22,000 to 1. You can purchase a minimum of £25 in Premium Bonds up to a maximum holding of £50,000 per person, and your original investment remains fully accessible—you can cash in your bonds at any time to get your money back at face value.

Premium Bonds present unique considerations for estate planning under the National Loans Act 1968 and The National Savings (No. 2) Regulations 2015. When you die, your Premium Bonds are included in your estate at their face value for Inheritance Tax purposes, as confirmed by HMRC's Inheritance Tax Manual (IHTM10081-10082). Unlike some financial products that can be transferred to surviving spouses or designated beneficiaries, Premium Bonds cannot be transferred to anyone—they must be cashed by your executor. However, NS&I allows bonds to remain active in the estate for up to 12 months after death, continuing to enter monthly prize draws during this period. Any prizes won after death but before the bonds are cashed go directly to the estate. If the deceased held more than £5,000 in total NS&I savings (including Premium Bonds), executors must obtain a grant of probate before NS&I will release the funds. For holdings under £5,000, NS&I may release the funds with just a death certificate, though they reserve the right to request probate for any amount. Executors must also check for any unclaimed prizes won before death, as these are included in the estate valuation and reported on form IHT406.

Consider Michael, who dies at age 58 with £12,000 in Premium Bonds he'd held for 15 years. His executor Rachel must obtain probate because the holding exceeds £5,000. While waiting four months for probate, Michael's bonds continue entering prize draws and win £75, which is added to the estate. Rachel cannot transfer the bonds to Michael's two children who inherit his estate—she must cash them with NS&I once probate is granted, and the children receive £12,075 in cash. Because Michael's total estate of £280,000 (including the Premium Bonds) stays below the £325,000 Inheritance Tax threshold, no Inheritance Tax is due. Or take Thomas, who dies with £4,500 in Premium Bonds and a modest estate. His partner Sarah, acting as executor, can claim the bonds without probate since they're under the £5,000 threshold. NS&I pays Sarah £4,550 after discovering Thomas had won £50 in his final prize draw before death—an unclaimed prize that forms part of his estate.

Common Questions

"What happens to Premium Bonds when someone dies?"

Premium Bonds cannot be transferred to beneficiaries—they must be cashed by the executor. NS&I allows bonds to remain in the estate for up to 12 months after death, during which they continue entering prize draws. Any winnings during this period go to the estate. Once cashed, the proceeds are distributed according to the will or intestacy rules.

"Do I need probate to access Premium Bonds after someone dies?"

Yes, probate is required if the deceased held more than £5,000 in total NS&I savings (including Premium Bonds). For amounts under £5,000, NS&I may release the funds without a grant of probate, though they reserve the right to request it for any amount. The executor must notify NS&I of the death and provide the death certificate to claim the bonds and any prizes won after death.

"Are Premium Bonds included in my estate for Inheritance Tax?"

Yes, Premium Bonds are included in your estate at their face value for Inheritance Tax purposes. While prizes are tax-free during your lifetime (no Income Tax or Capital Gains Tax), the total value of all bonds you own counts toward the £325,000 Inheritance Tax threshold. Any unclaimed prizes won before death are also included in the estate valuation reported on form IHT406.

Common Misconceptions

Myth: Premium Bonds avoid Inheritance Tax because the prizes are tax-free.

Reality: Premium Bonds are fully included in your estate at face value for Inheritance Tax calculations. While prizes are free from Income Tax and Capital Gains Tax during your lifetime, this doesn't exempt the bonds from Inheritance Tax when you die. If your total estate (including Premium Bonds) exceeds £325,000, Inheritance Tax at 40% applies to the excess. The tax-free prize element only applies during the bondholder's lifetime, not to estate taxation after death.

Myth: I can leave my Premium Bonds directly to my children in my will, and they'll keep earning prizes.

Reality: Premium Bonds cannot be transferred to anyone—not even your spouse or children. When you die, your executor must cash the bonds with NS&I, and the cash proceeds become part of your estate. Your beneficiaries receive money, not the actual bonds. While bonds can remain active for up to 12 months after death continuing to enter prize draws, they must eventually be cashed out. NS&I's rules specifically prohibit transfer—only redemption for cash is permitted.

  • Investment Portfolio: Premium Bonds form part of a broader investment portfolio, representing a unique asset class that offers capital security without guaranteed returns.
  • NS&I: NS&I (National Savings & Investments) is the government-backed institution that issues and administers Premium Bonds alongside other savings products.
  • Estate Value: Premium Bonds contribute to total estate value at their face value for Inheritance Tax calculations, regardless of prizes won.
  • Financial Assets: Premium Bonds are classified as financial assets requiring executors to notify NS&I, check for unclaimed prizes, and manage redemption properly.

Need Help with Your Will?

Understanding how Premium Bonds and other financial assets are handled in your estate helps you plan effectively and ensures executors know what to expect. Whether you hold £5,000 or £50,000 in Premium Bonds, documenting them properly in your estate planning gives your loved ones clarity.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.