Martin Lewis has issued a warning about a common inheritance tax mistake that could cost people thousands of pounds. The MoneySavingExpert founder explained on his latest podcast that Junior ISAs, while tax-free for income and growth, do not protect savings from inheritance tax.
A listener asked whether Junior ISA funds are excluded from an estate for inheritance tax purposes. Mr Lewis clarified: "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."
Understanding the Seven-Year Rule
Junior ISAs allow saving up to £9,000 each tax year for a child under 18. However, when gifting money to a child for their Junior ISA, the same inheritance tax rules apply as for any other gift. 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 is a 40% levy on the total value of assets passed on upon death. Individuals can bequeath up to £325,000 without incurring tax, with an additional £175,000 nil rate allowance available when transferring a main residence to direct descendants.
How to Reduce Inheritance Tax Bills
Gifting assets is one way to reduce the overall inheritance tax 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.
Additionally, any amount can be gifted from regular income, provided such transfers do not compromise the giver's standard of living. Every individual may distribute up to £3,000 in gifts annually, split among any number of recipients. Separately, up to £250 can be given to different individuals.
Wedding and Civil Partnership Gifts
Another exemption applies when giving money for a wedding or civil partnership. Parents can give up to £5,000 to their children, grandparents or great-grandparents can give £2,500 to a grandchild or great-grandchild, and up to £1,000 can be given to any other person. This allowance can be combined with the standard £3,000 annual exemption, potentially allowing up to £8,000 to be handed over to a child on their wedding day without inheritance tax liability.
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.
