Guest post regarding Junior ISAs and IHT.

Junior ISAs are a tax efficient way of saving. Neither donors to a JISA or the holder have to pay tax on interest earned.

Although the interest earned by a JISA is not subject to income tax, there may still be issues with the Inland Revenue. This is because of inheritance tax.

A promised rise in the threshold for inheritance tax has not happened. This means that many more estates will be liable to duties than would have been the case otherwise. Even payments into a Junior ISA made before death could be subject to a levy.

Gifts

One of the ways in which it is common to plan for inheritance tax is by giving gifts while still alive that are not subject to taxation. There is an annual allowance of £3000 that can be given away without consequences from tax, and a JISA can be a suitable product to pay it into.

Anybody can pay into a Junior ISA, not just the parents of the child that it is in the name of. This means that grandparents and other relatives can pay into a JISA.

Seven Year Rule

Although there are annual allowances for gifts that are not subject to inheritance tax, any gift can potentially be exempt, as long as the giver lives for a further seven years. If however the giver does die in in this period a chain of events is set into motion.

The first thing that happens is that the tax authorities will have to take a look at the gift, known technically as a ‘Potentially Exempt Transfer’ (PET), along with the history of giving since and in the seven years prior to see whether inheritance tax is due.

If inheritance tax falls due on a PET it will have to be paid by the recipient of the gift. If the giver has died within three years of the gift then this will be at the full rate. For every year after the first three the tax liability is reduced by 20%, which means that if a donor passes on between six and the seven year limit there will be a discount of 80% in the amount of tax due.

Other considerations

It is important to remember that the money put into a Junior ISA then belongs entirely to the child. When that child turns eighteen they then have full control of that money, and can do absolutely whatever they want with it.

Ultimately the freeze in the inheritance tax threshold, along with the inexorable rise of property prices means that many more people will come to be subject to tax on their estates. Getting into the habit of giving early is for many going to be a good strategy, and a Junior ISA has the potential to be a substantial nest egg.

Pamela Chimbonda writes in association with Alliance Trust Savings.