You can do several things to reduce your tax bill
Martin Lewis has offered some advice on a tax that many savers may be unaware could apply to their savings. He recently spoke on his BBC podcast about the best ways to grow your savings and the various types of accounts available.
A listener wrote in wanting to know whether junior ISA funds are considered outside of your estate for inheritance tax purposes. With junior ISAs, you can deposit up to £9,000 per tax year for a child under the age of 18.
A significant benefit of ISAs is that they are completely tax-free, with no tax due on any interest earned or investment growth within an ISA wrapper. In response to the question, Mr Lewis said: “The tax-free element of junior ISAs is all about the income – on savings that’s interest, on shares that’s dividend and the capital gains on any growth.
“It is not a protection from inheritance tax.” He went on to clarify how the rules operate when gifting money to a child to place into their junior ISA.
Many different allowances
There are certain limits on how much you can give away each tax year without ultimately incurring inheritance tax on those sums. Mr Lewis said: “There are no special rules.
“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. Although there are lots of different gift allowances, and you can give money from income.”
Inheritance tax is a substantial 40 per cent levy applied to the total value of assets you leave behind when you pass away. You can transfer up to £325,000 in assets tax-free, with an additional £175,000 nil rate allowance available when leaving a main residence to a direct descendant.
A person can transfer any unused allowances to their spouse or civil partner when they die, potentially enabling them to pass on up to £1million in assets without tax liability. However, if you are subject to the tax, one way to reduce your liability is through gifting.
Seven-year rule
You can gift any sum without incurring the tax provided you survive for up to seven years following the gift. The rate payable on the amount decreases as you near the seven-year milestone.
You can also gift any sum from your regular income, provided it doesn’t impact your standard of living. The regulations also permit you to gift up to a certain amount each financial year.
Each individual can gift up to £3,000 annually, split between any number of recipients. You can also separately make any number of gifts up to £250 to different individuals.
Another option for making tax-exempt gifts is if someone you know is getting married or entering a civil partnership. You can gift up to £5,000 to one of your children in this situation, or £2,500 to a grandchild or great-grandchild.
A person can also gift up to £1,000 to any other person on such an occasion. This can be combined with the standard £3,000 annual allowance.
For instance, you could hand over as much as £8,000 to one of your children when they are getting married.
