Martin Lewis has issued a warning to savers that junior ISAs are not protected from inheritance tax, despite being tax-free for income and capital gains. Speaking on his BBC podcast, the money-saving expert addressed a listener's question about whether funds in a junior ISA fall outside an estate for inheritance tax purposes.
Junior ISAs and Tax
Junior ISAs allow parents or guardians to deposit up to £9,000 per tax year for a child under 18. While interest, dividends, and capital gains within the ISA are tax-free, Lewis stressed that this does not extend to inheritance tax. "The tax-free element of junior ISAs is all about the income... It is not a protection from inheritance tax," he said.
Gifting Rules
When money is gifted to a child for a junior ISA, the same inheritance tax rules apply as for any other gift. Lewis explained: "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."
Inheritance tax is charged at 40% on assets above £325,000, with an additional £175,000 nil-rate band for a main residence left to direct descendants. Unused allowances can be transferred to a spouse or civil partner, potentially allowing up to £1 million tax-free.
Seven-Year Rule
Gifts are exempt from inheritance tax if the donor survives seven years after making the gift. The tax rate on the gift decreases the closer the donor gets to the seven-year mark. Regular gifts from income that do not affect the donor's standard of living are also exempt.
Annual Allowances
Each individual can gift up to £3,000 per tax year, split among multiple recipients. Additionally, gifts of up to £250 per person can be made to any number of individuals separately. Special allowances apply for weddings or civil partnerships: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person. These can be combined with the annual £3,000 allowance, allowing up to £8,000 to a child when they marry.
