Martin Lewis has offered guidance on a tax that many people may not realise affects their savings. MoneySavingExpert discussed on his latest podcast how to effectively build your savings and the various types of accounts available.
A listener submitted a question asking whether junior ISA funds are excluded from your estate for inheritance tax purposes. Junior ISAs allow you to save up to £9,000 each tax year for a child under 18.
A major benefit of ISAs is that they’re completely tax-free, meaning no tax is payable on any interest earned or investment growth held within an ISA wrapper. Mr Lewis explained: “The tax-free element of junior ISAs is all about the income from savings that’s interest, on shares that’s dividend and the capital gains on any growth.
“It is not a protection from inheritance tax.” He outlined how the regulations would apply if you’re transferring money to a child for their junior ISA. You can gift up to certain thresholds each tax year without ultimately being liable for inheritance tax on these sums.
Mr Lewis said: “There are no special rules. If you’re giving a child money to go in a junior ISA, you have the same seven-year rule that you have from gifting money in any other way. Although there are lots of different gift allowances, and you can give money from income.”
Inheritance tax represents a substantial 40% levy imposed on the total worth of assets you pass on upon death. Individuals can bequeath up to £325,000 in assets without incurring tax, with an additional £175,000 nil rate allowance available when transferring a main residence to direct descendants.
Any unused allowances can be transferred to a surviving spouse or civil partner upon death, potentially enabling couples to pass on assets worth up to £1 million tax-free. If you are facing a bill on your estate, gifting assets is one way to reduce the overall bill.
People may gift unlimited amounts without triggering tax, provided they live for seven years after the transfer. The tax rate on the amount decreases progressively as the seven-year milestone approaches.
You can also gift any amount from your regular income, provided such transfers don’t compromise your standard of living. You can also give away up to certain limits each financial year.
Every individual may distribute up to £3,000 in gifts annually, split among any number of recipients. Separately, you can give up to £250 in gifts to different individuals.
Another exemption applies when giving away an amount to someone getting married or entering a civil partnership. Parents can give away up to £5,000 to their children for such occasions, while grandparents or great-grandparents may give £2,500 to a grandchild or great-grandchild.
You can also gift up to £1,000 to any other person on such an occasion. This allowance can be combined with the standard £3,000 annual exemption. As an illustration, you could potentially hand over as much as £8,000 to a child on their wedding day and this amount will not be liable for inheritance tax.