Maximising opportunities to minimise inheritance tax – Junior ISAs
When it comes to tax planning, the smaller inheritance tax allowances can sometimes be overlooked. However, lifetime gifting to friends and family can be an effective way of reducing the value of your estate for inheritance tax reasons as well as helping to benefit those people that mean the most to you. One way of doing this for those with children and grandchildren is paying into a Junior ISA.
Junior ISAs can be opened for any child or grandchild who is under 18 and does not already have a Child Trust Fund in place (it is, however, possible to transfer a Child Trust Fund into a Junior ISA). For the current tax year, contributions of up to £4,368 to a Junior ISA can be made tax-free.
So what are the benefits of paying into a Junior ISA? The child or grandchild subject to the fund has money protected in trust and saved until they reach 18 and the beginning of adulthood. At that point the child or grandchild takes control of the money and this is at a time when they are likely to need it, possibly to fund university fees or to purchase their first car for example.
One way of paying into a Junior ISA is to put in place regular monthly payments for the child or grandchild in question. Such a gift can be classed as one out of excess income and, so long as your lifestyle is not adversely affected by making such payments, the contributions are exempt from inheritance tax altogether. It should be stressed that any payments must be out of income and not capital to qualify for this exemption. If the payments are instead made out of capital, they will come within either your small gift exemption of £250 per person per year or within your annual exemption of £3,000. Should you go above either of these thresholds, inheritance tax could become payable if you die within the subsequent seven years of making the relevant payments.
It should also be highlighted that the current income tax anti-avoidance rules on parental gifts to children that generate more than £100 of gross income do not apply to Junior ISAs. It is also the case that contributions to a Junior ISA do not affect a child or grandchild’s ability to contribute to their own Adult ISA from the age of 16, which provides them with a further tax-free saving opportunity.
If you would like more information or would like to receive advice on tax planning tailored to your specific circumstances, please contact a member of our Tax and Estate planning department.