Junior ISAs – the secret inheritance tax weapon

The biggest intergenerational wealth transfer in history will see many more families hit with hefty inheritance tax (IHT) bills. IHT receipts hit record highs in the 2023/24 tax year and will continue to trend upwards as it's expected around £7 trillion will be passed between generations in the UK by 2050.

In the Autumn Budget, Chancellor Rachel Reeves announced the nil rate band (NRB) for IHT will be frozen at £325,000 until 2030. She also revealed that pensions will now form part of people’s estate for IHT purposes, meaning more people will fall into paying tax on the assets they inherit. The current rate of inheritance above the nil rate threshold is 40%.

Making plans to reduce your estate’s inheritance tax (IHT) bill can be difficult as emotions and expectations often collide. But planning ahead with ample time can help to pass on some of your wealth tax free and give future generations the helping hand they need.

Article at a glance

• Gifting money to children or grandchildren through a Junior ISA can be a great way to reduce your inheritance tax bill
• 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

Inheritance tax is a tax on your overall estate, which includes properties and pensions. 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 is frozen until April 2030.

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. This amount is fixed until 2030.

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, like shares and bonds, 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 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 IHT. If you pass your home onto your children (including adopted, fostered or stepchildren) or grandchildren, the threshold can increase to £500,000.

If you are married or in a civil partnership, your estate can be passed on to your partner after your death free from IHT. If you have left legacies to someone other than your spouse, 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.

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.

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 5^th April tax year deadline. This could fall outside of your estate for IHT purposes.

Smaller gifts of £250 per person each year are allowed on top of this too, providing they aren't to the same people as the gifting allowance.

Any gifts over and above the £3,000 allowance could be subject to IHT, depending on how long you live for. This is known as the seven-year rule.

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

Paying regular monthly sums could also reduce your IHT bill

There is a another, little-known way of passing on your wealth without it affecting any future IHT liability by making “gifts from surplus income”. You can make any number of small gifts without them being considered part of your estate, providing they are:

• Made regularly
• From surplus income
• And, mean you do not dip into your savings to maintain your standard of living

One way to take advantage of this rule is to set up regular contributions to a JISA via direct debit. It’s important that you keep records of your gifts, expenses and income for when your estate is valued.

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