Some years later one of her bonds won a prize and Joe was furious to discover it was ineligible for the payout. His plan to persuade his daughter-in-law Clarrie to pay the cheque into her building society account backfired, so he could do nothing but return the valueless bond to National Savings.
This incident from The Archers radio serial illustrates one of the misunderstandings about Premium Bonds. They cannot be transferred to beneficiaries of a will and should be cashed in within 12 months of the date of death, or they cease to qualify for prizes.
If the holder died mid-June 1992, the last eligible draw would be 1 June 1993. National Savings points out that a named beneficiary can only receive the proceeds of the bonds and not the bonds themselves. A prize won during the 12 months following the death of the holder will be paid into the general estate.
Executors of estates can check exactly what Premium Bonds and other National Savings products are held by filling in form DNS 904, which is available from post offices. The tax advantages of National Savings certificates can be passed on at death, even if the recipient goes over the limit ( pounds 7,500 for the current 37th issue).
If, say, someone held pounds 5,000- worth and was left a further pounds 5,000 by his father, he could retain pounds 10,000 but his own initial holding could not be increased to pounds 7,500 unless he was re-investing the proceeds of older issues, for which there is a further limit of pounds 10,000.
Generally it pays to keep certificates. The return on the 37th issue starts at 5.5 per cent and rises to 11 per cent at the end of the fifth year. The current index-linked certificate goes from straight RPI to RPI plus 4.5 per cent over the same period.
With the annual plan, no further payments can be made by the executors, but as long as there have been at least seven payments, interest accrues at the full rate (up to 8 per cent after five years). If there are six or fewer payments, then a flat interest rate of 3 per cent will apply and the certificates should be cashed in.
The rules are different for PEPs and Tessas, which cannot be inherited so they cease to be exempt from tax at the date of death. On PEPs managers must repay any tax they have claimed on dividends and deduct basic rate tax on all future interest credited to the plan.
The precise valuation of the assets will then depend on the shares being transferred to the beneficiaries or sold. If there is no liability to inheritance tax and share prices are stable, it will make little difference. But if the market falls, the impact of future capital gains tax (and allowable losses) and inheritance tax must be taken into account.
Unlike PEPs Tessas must run five years to qualify for tax relief. But this does not apply on death. Interest till then is tax-free, as are bonuses already paid, but the estate is liable to tax on subsequent interest.
The problem with some Tessas, such as the Bristol and West one, is that the bonus may not be due until maturity. If the account is closed even a few days early the whole bonus is lost. It is worth checking exactly what net rate of interest will be paid, since there is no obligation on a bank or building society to continue preferential terms once the Tessa has been terminated.
Anyone winding up an estate with an investment in a Business Expansion Scheme may well run into problems with valuation but the tax relief is not lost on death. If the investor dies within the five-year qualifying period, the Revenue does not claw back a percentage of the tax from the estate, but the beneficiaries will be liable to tax on any subsequent profits.
The potential gain or loss will depend on the terms of the scheme. These should be checked before taking it out, especially by older investors.
Charles Fry of the BES specialist Johnson Fry says: 'Executors and beneficiaries would probably be best advised to hang on, as it may be impossible to find buyers for shares in the more speculative schemes in the first five years. It is much easier with contracted exit schemes based on property values. A loan can usually be arranged if funds are needed urgently.'
Specifying in a will who should get what investments, tax-free or otherwise, could complicate matters further. A London reader warns that his father died leaving a tax-free sum to his second wife and the estate's residue to his son from his first marriage. Not only was the residue reduced in value by a sharp fall in the stock market, there was also a hefty tax bill.