From April 2027, unused pension funds and some pension death benefits will fall into the scope of Inheritance Tax (IHT) for the first time.

The government expects the measure to raise an additional £1.4 billion a year by 2029/30. In the first 12 months after it comes into effect, around 10,500 estates could face an IHT bill that they wouldn’t have had before.

These changes could mean you need to revisit your estate planning. One option might be to lower the value of your estate through gifting, possibly passing money to the young people in your life through a Junior ISA (JISA).

In fact, FTAdviser recently reported on a likely increase in JISA uptake as a result of the changes.

Keep reading to find out how paying into a JISA could support your loved ones while lowering a potential IHT bill on death, and how you might contribute tax-efficiently, too.

JISAs could be a tax-efficient way to build a nest egg for a loved one

A JISA is the junior version of a full adult ISA and shares the latter product’s tax efficiency. As with an adult ISA, you can opt for a Cash or Stocks and Shares JISA and set it up on your child’s behalf from the moment they are born.

You don’t pay tax on the interest earned in a Cash JISA, and Stocks and Shares JISA gains are free of both Income Tax and Capital Gains Tax (CGT). While the ISA Allowance for adult ISAs is £20,000, the JISA Allowance stands at just £9,000.

The account will be in your child’s name, and they can begin to take control of it from age 16. They can make withdrawals from age 18, but this doesn’t necessarily mean you need to worry they’ll immediately withdraw the whole amount. IFA Magazine confirms that just 6.5% of 18-year-olds empty their Junior ISA at that age.

Building a nest egg for your child’s future now can help them to feel financially secure as they enter employment or higher education. You’ll also be instilling important lessons about money management and helping them to form good saving and investment habits.

It could be tax-efficient for you too. But remember, a JISA is just one option, so seeking advice is key.

Inheritance Tax and pension rule changes might mean an estate planning rethink

Under current rules, unused funds can pass to your chosen beneficiary tax-free if you die before age 75. If you die after age 75, these funds can still pass to your beneficiary, but they will be taxed at their marginal rate.

While this has historically made pensions a useful part of a tax-efficient estate plan, this will cease to be the case in April 2027.

These rule changes will require a revisiting of estate and legacy plans for many. But it’s worth remembering that they will only affect you if there is likely to be IHT to pay on your estate. If you suspect there will be a liability, you might want to consider taking pensions you had intended to leave untouched and looking at other ways to effectively lower the value of your estate.

One way to do so might be via tax-efficient gifting.

HMRC gifting exemptions could help to lower your estate’s value

Gift giving during your lifetime can lower the value of your estate for IHT purposes and is generally IHT-free if you survive for seven years after the date the gift is made. For this reason, such gifts are known as potentially exempt transfers (PETs).

Some gifts are also IHT-free the moment you make them, thanks to certain HMRC exemptions.

These include the:

• £3,000 annual exemption – Gifts up to a total of £3,000 (or £6,000 as a couple) immediately fall outside your estate, and unused allowance can be carried forward for up to a year.

• Small gifts exemption – You can make gifts of up to £250 per person to as many people as you like, as long as you have not used the above exemption with the same person.

When contributing to a child’s JISA, there’s one other exemption that could prove particularly useful.

Normal expenditure out of income exemption

Regular gifts considered part of your “normal expenditure” are IHT-free and not subject to the seven-year PET rule.

You can set up a regular contribution to your child or grandchild’s JISA, and the contributions will be IHT-free if you can prove that the payments are:

• Regular
• Made from income
• Not detrimental to your standard of living.

HMRC may ask for proof that these conditions are being met, so accurate record-keeping is key.

Get in touch

If you would like to discuss how best to build a nest egg for your child or grandchild, or you have queries regarding any other aspect of your long-term financial plans, please email enquiries@futureplanningwm.co.uk or call 01793 575553.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.