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How a junior ISA could help you save on inheritance tax

One of the big advantages of junior ISAs (JISAs) is that families can put money away over time for their children and grandchildren without them needing to pay inheritance tax on it.

Article at a glance

  • Gifting your grandchild money through their junior ISA can be a way of reducing how much inheritance tax is due when you die, as it means you have less money to be inherited
  • Any money paid into a junior ISA can only be taken out by the child, and only when they turn 18.
  • You can put up to £9,000 in a junior ISA each tax year.
  • Only a parent or legal guardian can open a junior ISA for a child, but anyone can pay in.
  • You can gift your grandchild money without them needing to pay inheritance tax, but there is a limit and some exemptions.

Find out more about our Junior ISA

What is a Junior ISA?

Junior ISAs (JISAs) are tax-free savings accounts for children. That means the child won’t need to pay any tax on any interest or returns they gain. JISAs can only be opened by the child's parents or legal guardians, but anyone can pay into them and the money is locked in for the child to access when they turn 18.

There are two types of JISA – cash JISAs and stocks and shares JISAs.

Cash junior ISAs

Cash JISAs aren’t invested in the stock market, so your money is protected if the stock market goes down. They earn interest like current accounts do, but the money in a cash JISA can lose value over time because of inflation.

Stocks and shares junior ISAs

Money you put into a stocks and shares JISA is invested in the stock market, which means it has greater potential to grow in the long term, but it also means the value of your investments could go down as well as up.

What are the advantages to moving money into a junior ISA?

There are many reasons why moving some of your money into a junior ISA could be a good idea.

If you’re worried about inheritance tax for example, gifting money to your children or grandchildren now means they get some of their inheritance early. There’s less for them to then inherit after you die which could mean they have less inheritance tax to pay, as long as you don't pass away within seven years of giving them the money and your gift fits into an exemption, but we'll expand on that later.

It’s also a great way to give your children or grandchildren some money when they need it. Instead of leaving a lump sum in your Will for them to receive after you die, you could put that money into a JISA over time so they get it at the start of adulthood when that money could be really helpful.

How much can you gift to your child or grandchild each year?

You can gift your child or grandchild as much money as you like from any regular income you receive, such as from a pension. However, you have to set this up as a regular payment (for example monthly or yearly), and it must not affect your standard of living. This is known as "normal expenditure out of income".

Other gifts, such as one-off gifts or gifts that don't come out of your regular income, could be cash or other things you own like shares you've bought in companies.

These are known as "Potentially Exempt Transfers", which means they don't count towards your estate so whoever you give them to won't need to pay inheritance tax on it, unless you pass away within seven years.

What happens if you pass away within seven years of gifting your family money?

Sometimes money you give away before you die can still count as part of your estate, which means whoever you gave it to might need to pay inheritance tax after you die. This depends on how soon after you pass away:

  • If you die less than three years after giving money away, it'll count as part of your estate and be taken into account when it's being decided how much inheritance tax is due.
  • If you die between three and seven years after giving the gifts away, there is taper relief available to reduce the amount of inheritance tax your loved ones will have to pay. This means they might not pay the full inheritance tax, but may pay something.
  • Anything you gave away seven years or more before you die is not subject to inheritance tax.

If a gift is covered by an exemption or relief, the seven-year rule doesn't apply as this will mean no inheritance tax is due anyway. We explain these below.

How do inheritance tax allowances affect you?

If you have £325,000 or less to pass on after you die, your family normally won't need to pay any inheritance tax. They may need to pay tax on anything above this, however you can still give some money away before you die without them being taxed on it.

If you'd like to give away money from your estate, there are two main limits to be aware of. These only apply if you pass away within seven years of gifting the money, if it’s been longer than that, there’s no inheritance tax to pay.

There is a yearly inheritance tax exemption of £3,000

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 this allowance, anything you have left carries over into the next year, but only for one year.

There is an inheritance tax small gift allowance of £250

You can also give away £250 per person, per year.

However, you can’t gift this to someone you’ve already given money to during the year. For example, if you gave your grandchild £3,000, you couldn’t then use the small gift allowance on them as well. You could still give a different person £250.

There is an inheritance tax relief for "normal expenditure out of income"

As mentioned above, you can also give money away if it comes out of your regular income. This has to be a payment that's set up regularly and it can't leave you without enough money to maintain your standard of living.

How much can you put into a junior ISA each year?

While only someone with parental responsibility can open a junior ISA for a child, anyone can pay into it.

This means that if you’re planning on putting money into your child or grandchild’s junior ISA, you should check with other family members first and make sure you’re not taking away someone else’s chance to pay into it.

For the current tax year, the yearly savings limit for a junior ISA is £9,000. This means that, even if more than one person is contributing to the same JISA, you could use all of your inheritance tax exemption allowance of £3,000 and there would still be £6,000 that other people can put in.

If you're the parent or grandparent to a lot of children, you should also think about how you’re splitting up the money you want to give your family and just how much you’ll be giving away in total over the years.

Of course, no-one knows what’s going to happen, but if you’re worried about hitting that limit, a good way to make sure you’re doing the most you can is to start putting your money into your child or grandchild’s junior ISA early and regularly. That way, you can keep track of how much you’ve given away over time, especially if you have more than one child in your life.

Could a children's tax-exempt savings plan be a good alternative to a junior ISA?

Of course, you can only put money into your grandchild’s junior ISA if their parents or legal guardians have opened one. If your grandchild doesn’t have a junior ISA, or if they’ve reached the £9,000 yearly limit on how much can be paid in, you could still help save for their future by taking out a children's tax-exempt savings plan (like our Junior Bond).

Unlike the Junior ISA, which can only be opened by a parent or legal guardian, anyone can take out a tax-exempt savings plan for a child.

You pick a fixed payment term between 10 and 25 years when you open the account and need to commit to regular monthly or yearly payments. As long as you don’t take the money out early and don’t miss your payments, the child won’t pay any income tax or Capital Gains Tax on the money they get.

Things to consider when moving your money into a junior ISA

The main thing to think about when building up junior ISA savings is being consistent with putting money in to take full advantage of the yearly allowance. The amount in the junior ISA allowance can change every year, so be sure to check for any changes when the new tax year starts.

  • Whether you put in a yearly lump sum or pay little and often into your child or grandchild’s junior ISA is up to you.
  • You can set up regular payments that come straight out of your current account. As long as they fit the conditions for "normal expenditure out of income", these payments will mean there's less money for your family to pay inheritance tax on.
  • Any gifts that don't qualify for an exemption will still reduce your estate when it comes to inheritance tax, as long as you don't pass away within seven years of giving that gift.
Junior ISA

Why not take a look at the OneFamily Junior ISA?

With our stocks and shares Junior ISA you can invest as little as £10 a month and up to £9,000 a year and you can choose between two types of funds. Anyone - a family member, friend, and even your neighbour - can pay into it and the child won't pay any taxes on the returns when they get access at 18.

Learn more about our Junior ISA

Stocks and shares JISAs have good long-term growth potential, but the value of your investments can go up or down and you child could get back less money than you’ve put in.

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