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Junior ISAs – the secret inheritance tax weapon

The biggest intergenerational wealth transfer in history will see many more families hit with hefty inheritance tax bill. Gifting to Junior ISAs is one way to transfer more wealth onto future generations.

| 7 min read

Making plans to reduce your estate’s inheritance tax (IHT) bill can be difficult because emotions and expectations often collide. But planning ahead gives you more time to transfer some of your wealth onto future generations while you’re still around.

Article at a glance

  • Gifting money to your grandchildren through a Junior ISA can be a great way to reduce the inheritance tax bill when you pass away
  • You can contribute up to £9,000 to a Junior ISA each tax year
  • Junior ISA’s benefit from tax-free income and growth
  • At 18, the child becomes the beneficial owner and can access the money on their 18th birthday

Inheritance tax is a tax on your overall estate, which can include property, money, and possessions. It was originally deemed to only apply to the rich, but now a much greater proportion of the population is affected, since the threshold for paying the tax of £325,000 was frozen until April 2028.

Gifting to Junior ISAs could be the secret weapon to transferring more wealth onto younger generations to give them the financial head start they need.

What is a Junior ISA?

A Junior ISA, or JISA, is an individual savings account for children under the age of 18. Similar to adult ISAs, the tax benefits are the same, so the child doesn’t have to pay any income tax or capital gains tax. It’s possible to open a Junior Cash ISA and a Junior Stocks & Shares ISA, but you cannot have more than one of each.

It’s a popular way for parents, guardians, family members, or friends to save money on behalf of a child and give them a financial head start. Collectively, you can contribute up to the annual allowance of £9,000.

A Junior Stocks & Shares ISA is an investment account, so the parent or legal guardian has to set it up. Once created they can choose from a wide range of assets to take advantage of global investment opportunities and maximise growth. Investments rise and fall in value, so you could get less than you invest.

Once the child reaches 18, the account matures and rolls into an adult ISA and they can access the money. Please note, Junior ISAs were introduced in the UK in November 2011 to replace the Child Trust Fund (CTF) scheme. It’s not possible to hold both accounts at the same time, but you can transfer a Child Trust Fund into a JISA.

Open a Junior Stocks & Shares ISA

Who pays inheritance tax?

The current nil-rate band (NRB) for IHT is £325,000. This means if the total value of your estate is less than £325,000 you won’t be liable to pay any inheritance tax. If you pass your home onto your children (including adopted, fostered or stepchildren) or grandchildren, the threshold can increase to £500,000 per person.

If you are married or in a civil partnership, your estate will pass to your spouse after your death if this is your wish exempt from inheritance tax. If you have left legacies to someone other than your spouse in your will, this will utilise your NRB. Your spouse will inherit all or any remaining NRB, depending on the provisions of your will. This means that the combined threshold for a couple can be as much as £1m.y

How much can you gift each year?

You can give away a total of £3,000 a year, either to one person or several people, without them paying inheritance tax on it. If you don’t use all of your allowance, anything you have left carries over into the next year, but only for one year.

Any gifts over and above the £3,000 won’t be subject to IHT providing you live for seven years after giving them. This is known as the seven-year rule.

If you die within seven years of the gift and there’s IHT to pay on it – the amount due depends on when you gave it. Gifts given in the three years before your death are taxed at 40%. Gifts given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold. IHT rules can be complicated, so we recommend speaking to a tax specialist on more complex matters.

So, if you didn’t utilise your annual gifting allowance last tax year, you could add up to £6,000 to a Junior ISA before the 5th April tax year deadline. This could fall outside of your estate for IHT purposes.

Paying regular monthly sums could also reduce your IHT bill

There is a second, little-known way of passing on your wealth without it affecting any future inheritance tax liability. This is called “gifts from surplus income”. It means you can make any number of small gifts without them being considered part of your estate, even within the seven years before your death.

Paying regular sums into a JISA is a great way of achieving this. But your executors will have to prove that this was money you didn’t have to rely on to fund your day-to-day living expenses. If you have to keep dipping into your savings His Majesty’s Customs and Revenue would take the view that the gifts themselves came from the savings account.

It is therefore important that you keep records of your gifts, expenses and income.

Topping up an existing Charles Stanley Junior Stocks & Shares ISA

Only a parent or legal guardian can open a JISA and be the registered contact on the account. As a family member or friend, you can pay money into the JISA.

If you would like to pay money into an existing Charles Stanley JISA, you’ll need to obtain the relevant bank details from the registered contact – this will be the chosen parent or legal guardian.

What if my child has a Child Trust Fund?

You can transfer a Junior ISA to another provider at any time, as well as turning your Cash JISA into a Stocks & Shares JISA. If you or your child has an existing Child Trust Fund, you can track this down and notify your provider of the switch.

It’s important to note you can’t withdraw money from a JISA until your child turns 18. When this happens, their JISA account will change into an adult ISA – either a Cash or Stocks and Shares account, depending on what you had originally.

Act before tax year end - open a JISA today

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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