Junior ISAs could help with inheritance tax planning as more families utilise allowance

Junior ISAs (JISAs) are emerging as an effective inheritance planning tool amid impending pension inheritance tax changes.

The inheritance tax system is facing an overhaul in the coming years, with pensions forming part of taxable estates from April 2027.

The House of Lords last week criticised the pension changes but many people are now looking to find ways to pass on wealth to their loved ones in a more tax-efficient way to avoid giving too much unnecessarily to the taxman.

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One option is for parents or grandparents to put money into a JISA - savings accounts for children under age 18.

Increasing numbers of people are making use of the full £9,000 JISA allowance, a Freedom of Information request by Murphy Wealth to HMRC found. The research showed 78,330 accounts maximised their allowance in 2023/2024, the most since 2019/2020’s 80,060.

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

Adrian Murphy, chief executive of Murphy Wealth, said: “A lot of families are exploring different ways of passing down wealth to their loved ones earlier in life.

JISAs are a great way of doing that, providing tax-free growth and income that can compound over a significant period of time.

“With pensions becoming part of people’s estates from next year – the decision about which wouldn’t be reflected in these figures, as it was announced in the Autumn 2024 Budget – we would expect to see a further acceleration in the number of JISAs being maximised.”

The benefits of a JISA for inheritance planning

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

Pension wealth is set to form part of an estate for inheritance tax purposes from April 2027, which may affect how much can be passed on.

You could give financial gifts during your lifetime but, if they exceed inheritance tax gift allowances, there are risks of a tax bill if you pass away within seven years of the transfer.

JISAs provide another tax-efficient way that parents and grandparents can give their loved ones a financial boost.

You can gift up to £3,000 a year, either to one person or several people, without the money being liable for inheritance tax. If you don’t use all your allowance, anything left carries over into the next year, but only for one year. So you could technically put £6,000 into a JISA.

Murphy added: "Children can't access the accounts until they are 18, which also provides a level of assurance that the money will be used for some of the big life events that take place around that age – whether it's buying a first car, help with university costs, or taking that first step into a career or onto the property ladder.

“And the people making the contributions will likely get to see their child or grandchild enjoy that money, which may not be the case with other ways of tax-efficiently passing wealth down.”

Alice Haine, personal finance analyst at Bestinvest, highlights that the tax benefits mirror those of an adult ISA – with no capital gains or income tax.

But there are other advantages. She said: “JISAs sidestep the parental tax rules.

“If a child earns more than £100 in interest on money gifted by a parent and held in a regular savings account, that income is taxed as if it were the parent’s – an issue that does not apply to JISAs. Parents should tread carefully, however. There’s no point topping up a JISA if they might require the money for their own needs, because they can’t get it back.”

However you plan to pass wealth onto family members, Murphy said it’s important you have a plan and don’t leave yourself short.

He added: “Speak to a financial adviser who can provide guidance on how to sustainably gift money to children and grandchildren, while ensuring your financial requirements are taken care of in retirement.”

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