Several people asked for more information about the inheritance tax-friendly bonds mentioned in my column on February 9.

The bonds I referred to were not corporate bonds, which are a type of fixed interest security, or building society bonds, which are a type of fixed term deposit account.

The bonds in question are investment bonds as issued by life insurance companies.

A life insurance investment bond is not only a good investment vehicle for producing capital growth or income in an investor's lifetime, but is also a very useful investment when held within a discretionary will trust for inheritance tax planning after death.

Most income bearing assets, such as unit trusts, investment trusts and bank or building society accounts, produce interest or income. When held in a trust fund, any such interest or income is taxed at the trustee income tax rate, which is 40 per cent.

There is no liability to this tax on an investment bond when held as a trust asset, as a bond is deemed to be a non-income-bearing asset by HM Revenue and Customs.

If a married couple each establishes investment bonds now and write their wills to include a discretionary trust in them, when one of them dies their bond could be incorporated into their will trust.

The bond could then continue within the trust fund and tax-efficient income withdrawals could be directed to the surviving spouse or other beneficiaries of the trust.

On the spouse's subsequent death, the capital value in the bond will pass under the terms of the will trust to their children or other beneficiaries, without any inheritance tax being due on it.

This could save the beneficiaries as much as £114,000 at current tax rates.

The above could not happen with PEPs or ISAs held by the deceased, as these investments end on death and the funds from them are paid into the estate of the deceased or to their beneficiaries.

As a bond can 'live on' after the owner's death as an asset in their will trust, it can be a very useful investment for those with large amounts of savings or capital who have concerns about the inheritance tax bill they may be leaving for their children.

Contacting Nick

Nick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to nickplumb@aol.com or telephone Nick on 01449 675674.

Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.