What matters is the market value of the bond on the date of death. This involves an assessment of the hypothetical willing buyer and seller and what is the market and who’s in it. The fact that the asset is not assignable or tradable doesn’t matter or that its value can only be realised by triggering a mechanism based in contract and involving surrendering it for redemption by the other party. The Insurance Company is not the sole arbiter of this value, though challenging their opinion is a real hurdle needing an expert of equal stature.
However it is crucial to determine what is to be valued i.e. the precise characteristics of the investment because that the spectral being who must be presumed to buy it would have to accept them, here to be bound by the contractual terms and conditions. The case law has been forged mostly in relation to shares, particularly those unlisted.
A curious feature might be that notification may be integral under the contract to crystallisation of value. That may be deferred to the date of notification/surrender and it might occur then or even later. A surrender of an insurance policy backed by an investment portfolio might leave the owner open to market risk until the insurer has completed liquidation of the underlying assets; or the insurer might have undertaken to give a fixed quote at surrender and so live with that intervening risk.
Where there is such a risk inherent in the operation of the contract terms the value on the date of death is strictly not what the redemption formula eventually yields. It is what the disembodied parties might agree as the price based on their then expectation of that yield. No doubt the length of the interval and the volatility of the relevant underlying markets will play a part. The spectral buyer would probably be prepared to pay the value on the date of death with due allowance for the downside risk during the minimum period needed to cash in the policy.
IHTM 20084, 20211, and 20212 may help
That still leaves the procedural issue of how to correct the returned value and if that is possible. The Manual is mostly concerned with HMRC’s right to reopen an agreed valuation (see 30441-5) where it is in their favour to do so and the implication is that they might not do so if there has been an overvaluation unless their conscience can be tweaked and I suspect the facts would need to be egregious and the reasons non-culpable
Jack Harper