The IHT planning benefits of Junior ISAs

Paul Kennedy, head of tax planning at Fidelity Fundsnetwork, explains how Junior ISAs should be a welcome addition to the adviser’s tax-planning armoury...

Children may not be restless with excitement at the launch of the Junior ISA, but advisers should be pleased it will sweep aside many of the tax problems and legal issues associated previously with investing for children and offer possibilities for added IHT and CGT planning.

Like the adult ISA, investment returns from a Junior ISA will be free from personal liability to income and capital gains taxes. Likewise, the investment returns will not count towards the child’s personal income tax or CGT allowances, so those allowances remain available for other investments or any earnings that may arise.

The Junior ISA can also be rolled-over into an adult ISA at age 18 allowing the child to take a large ‘tax-exempt’ pot into adulthood.

Everyone can save

Unlike the adult ISA, anyone can contribute to the Junior ISA, allowing everyone to save for a child in a single vehicle. No tax is payable by any contributor to a Junior ISA. Importantly that includes the parents, which means the current income tax anti-avoidance rule on parental gifts to children that generate more than £100 gross income will not apply. Contributions to a Junior ISA do not affect the child’s own allowance for a cash ISA at ages 16 & 17, so there is no conflict here.

Gifts for grandchildren

For grandparents in particular, the potential for some IHT planning might be an extra incentive to help provide a ‘tax-free’ return for their grandchildren.
Currently, individuals can make gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from inheritance tax on death.

This delivers a potential IHT saving of £1,200 on current rates. This small amount can add up and regular use over an 18 year period could still get £54,000 out of the chargeable estate, delivering a potential tax saving of £21,600. The annual exemption is per person, so married grandparents could gift up to £6,000 per tax-year, which would be £108,000 over 18 years and a potential IHT saving of £43,200.

Though the annual Junior ISA allowance is only £3,600 per child there will often be more than one grandchild in the equation.

Annual exemptions

Any unused part of the £3,000 annual IHT exemption can be carried forward to the following tax year, but if it is not used in that year, it expires. In applying the annual exemptions, you use the exemption for the current year first, then use any unused part of the previous year’s exemption.