As more families use allowances, junior ISAs may be useful for inheritance tax planning

Future changes to the inheritance tax will restrict the amount of pension wealth that can be transferred, but more people might be choosing to maximize their loved ones' JISA allowance in the meantime

In light of upcoming changes to the pension inheritance tax, Junior ISAs (JISAs) are becoming a useful tool for inheritance planning.

Pensions will be included in taxable estates starting in April 2027 as part of an impending overhaul of the inheritance tax system.

Although the House of Lords criticized the pension changes last week, many people are now searching for more tax-efficient ways to transfer wealth to their loved ones in order to avoid giving the tax collector too much money.

One choice is for parents or grandparents to contribute funds to a JISA, which is a savings account for children under the age of eighteen.

The full 9,000 JISA allowance is being used by more people, according to data from a Freedom of Information request made to HMRC by Murphy Wealth. According to the study, 78,330 accounts maximized their allowance in 20232024the highest number since 80,060 in 2019 - 2020.

It also marks a 9 percent increase on the previous tax year (71,910) and a 41 percent rise since 2020/2021 (55,570).

"Many families are looking into various ways of transferring wealth to their loved ones earlier in life," stated Adrian Murphy, CEO of Murphy Wealth.

With tax-free growth and income that can compound over a long period of time, JISAs are an excellent way to achieve that.

As stated in the Autumn 2024 Budget, pensions will be included in people's estates starting next year, so the decision regarding which will not be reflected in these figures. As a result, we anticipate a further acceleration in the number of JISAs being maximized.

The advantages of using a JISA to plan for inheritance.

There are lots of ways to pass on money to your grandchildren or children.

For inheritance tax purposes, pension wealth will be included in an estate starting in April 2027, which could have an impact on the amount that can be transferred.

Giving money during your lifetime is possible, but if it exceeds inheritance tax gift allowances, you run the risk of having to pay taxes if you die within seven years of the transfer.

Another tax-efficient method for parents and grandparents to help their loved ones financially is through JISAs.

Up to £3,000 can be given annually to one or more recipients without incurring inheritance tax. Any remaining funds from your allowance carry over into the following year, but only for that one year. Thus, you could theoretically invest 6,000 in a JISA.

Murphy continued, "Kids can't access the accounts until they're eighteen, which also gives a degree of assurance that the money will be used for some of the major life events that happen around that age, like purchasing a first car, receiving financial aid for college, or starting a career or moving up the property ladder."

Additionally, unlike other tax-efficient methods of passing wealth down, the contributors will probably be able to watch their child or grandchild enjoy that money.

The tax advantages are similar to those of an adult ISA with no capital gains or income tax, according to Alice Haine, a personal finance analyst at Bestinvest.

There are additional benefits, though. "JISAs circumvent the parental tax rules," she stated.

"A problem that does not apply to JISAs is that if a child receives more than £100 in interest on money given by a parent and kept in a regular savings account, that income is taxed as if it were the parents. But parents should exercise caution. If they might need the money for personal expenses, there's no point in topping up a JISA because they won't be able to get it back. A "

Murphy stated that it's crucial to have a plan and don't leave yourself short, regardless of how you intend to transfer wealth to family members.

"Talk to a financial adviser who can offer advice on how to sustainably give money to children and grandchildren while making sure your retirement needs are met," he continued. A "

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