UK inheritance tax hikes: How can JISA help your wealth transfer

While recent changes to the budget have kept IHT at 40% and a tax-free threshold of £325,000 in asset value that can be passed down without incurring tax, from the 6th of April 2027, unused pension funds will become part of your estate for Inheritance Tax purposes.

After the 2027/2028 tax year begins, when an individual dies, IHT may be payable on unused pensions if it pushes their total estate past their total tax-free allowances.

While keeping an estate below the £325,000 threshold won’t be a problem for most people, data shows that thousands will ultimately be forced to pay more due to Inheritance Tax changes.

According to government figures, approximately 10,500 estates will pay IHT for the first time, while 38,500 will be forced to pay more Inheritance Tax.

The danger of having your pension savings push your Inheritance Tax higher can be compounded if you’re a homeowner, because your defined contribution pension would be added to the value of your property.

If you want to ensure that you leave as much money as possible for your loved ones, it could be worth taking a more proactive approach when transferring your wealth. One of the most effective tax-free options you could embrace is to contribute to your child or grandchild’s Junior ISA.

Junior ISA Tax Efficiency

Much like traditional individual savings accounts, Junior ISAs are a tax-free way of saving or investing money with no income or capital gains tax (CGT) payable on the profit made.

Junior ISAs (JISAs) can also come in the form of either Cash JISAs or Stocks and Shares JISAs, which means that money can either be saved at a predetermined rate of interest or invested in the stock market or other assets.

One of the great advantages of JISA savings and investments is that up to £9,000 can be deposited during each tax year until the child turns 18. With this annual tax-free allowance, JISAs are an excellent wealth-building strategy that can snowball over time thanks to compound interest rates and potential investment gains.

You can open and manage a JISA for your children if you’re their parent or legal guardian and once they turn 18 years of age, the money can be withdrawn or continued to be managed by them. If you’re a grandparent, you can be invited to contribute to your grandchild’s JISA at any time if the provider allows this.

Whether you’re thinking about transferring your wealth to your child or grandchildren under the age of 18, using a JISA can be a transformative way to share your wealth.

It Pays to Get Started Early

If you believe that your estate is likely to be worth more than the £325,000 IHT threshold, it certainly pays to adopt a proactive approach and to incorporate Junior ISAs into your wealth transfer strategy.

The tax rules associated with inheritance can be complex, and if you die within seven years of gifting lump sums to your loved ones, you may be liable for different forms of taxation.

For instance, if you die less than three years after giving a large lump sum away, it can still count as part of your estate and be included within the IHT threshold of your total asset values to decide how much Inheritance Tax you’re liable to pay.

If you die between three and seven years after gifting money to your children or grandchildren, they may be liable to pay taper relief, which can reduce the amount of Inheritance Tax to pay. Although this means they may not have to pay the full 40%, they could be liable for taxation.

Beyond this seven-year timeframe, your gifts will have no bearing on your Inheritance Tax. It’s this that makes saving in a Junior ISA for your children or grandchildren such an effective way to transfer your wealth at a time when it could have the maximum impact for your loved ones and will be less likely to incur IHT.

Additionally, because JISA funds can’t be touched until your loved one turns 18, there’s likely to be plenty of time to compound the funds saved. For example, simply depositing £1,000 in a Cash JISA and leaving it for five years at a hypothetical 5% annual interest rate will return

£1,276.28. Now imagine making a deposit each year for 18 years.

Sharing Your Wealth

It’s becoming more difficult to share your wealth while keeping your money away from the clutches of the taxman.

However, opening or contributing to a Junior ISA for your loved ones can not only help to keep your total asset values below that all-important £325,000 threshold, but it can also build a valuable nest egg for children in your family for when they reach adulthood.

It pays to get proactive when it comes to transferring your wealth, and a Junior ISA can unlock higher compounded returns at a pivotal time for both your loved ones and yourself.