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How a Junior ISA could help you save on inheritance tax

July 2022

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.

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 it 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 JISAs

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 JISAs

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 your money to 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 means they get some of their inheritance early and there’s less for them to inherit after you die. That means less inheritance tax to pay.

It’s also a great way to gift your children or grandchildren some money when they need it. Instead of them leaving a lump sum in your Will for them to receive when 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 as you like from any regular income you receive, such as from a pension.

However, it’s worth being aware that you can only gift your family up to £3,000 each year from your savings. If you go over this limit, it will be added to the value of your estate, which means they may need to pay tax on it.

The way you gift this money is up to you – it can be in a few large payments or in smaller regular payments.

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.

The limits on how much you can give away without paying inheritance tax only apply to gifts coming from your estate, like your savings, a car or a house. They won’t be taxed on anything you give away that comes out of your regular income, such as your pension.

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.

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

While only their parent or legal guardian 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 have a lot of children or grandchildren, 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.

Why could a Junior Bond 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 Junior Bond.

Unlike the Junior ISA, which can only be opened by a parent or legal guardian, anyone can take out a Junior Bond for a child.

You pick a fixed payment term between 10 and 25 years when you open the bond 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 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 this 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 monthly payments that come straight out of your current account. This kind of gift comes from extra income, so it won’t be affected by inheritance tax.
  • Any gifts given from your savings or estate will have to come out of one of your inheritance tax allowances, but only if you pass away within seven years.
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 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

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