Martin Lewis has shared some tips on his BBC podcast (Image: ITV)
Martin Lewis has provided some guidance about a sizeable tax that you may not realise applies to your savings. He spoke recently on his BBC podcast about how to best build up your savings and the different types of account you could go for.
One question came in from a fan of the show who wanted to know if junior ISA funds are considered to be outside of your estate for inheritance tax purposes. With junior ISAs, you can deposit up to £9,000 each tax year for a child under the age of 18.
A key advantage of ISAs is they are entirely tax-free, with no tax to pay on any interest earnings or investment growth within an ISA wrapper. 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 explained how the rules would work if you are giving away an amount to a child, to go into their junior ISA. You can give away up to certain limits each tax year without ultimately paying inheritance tax on these amounts.
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No special rules
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 hefty 40 percent tax that applies to the total value of assets you pass on when you die. You can pass on up to £325,000 in assets tax-free, and there is another £175,000 nil rate allowance when passing on a main residence to a direct descendant.
A person can pass on any unused allowances to their spouse or civil parnter when they die, so they could potentially pass on up to £1million in assets tax-free. However, if you are liable for the tax, one way to reduce your bill is to give away gifts.
Seven-year rule
You can give away any amount without paying the tax as long as you survive up to seven years after the gift is made. The rate you pay on the amount reduces as you approach the seven-year anniversary.
You can also give away any amount out of your regular income, as long as it does not affect your standard of living. The rules also allow you to give away up to a certain amount each financial year.
Each person can give away up to £3,000 in gifts each year, divided between any number of people. You can also separately give any number of gifts up to £250, to different people.
Another option to give away some gifts which will be exempt from the tax is if someone you know is getting married or entering a civil partnership. You can give up to £5,000 to one of your children doing this or £2,500 to a grandchild or great-grandchild.
You can also give up to £1,000 to any other person on such on occasion. You can combine this gift allowance with the £3,000 standard allowance. For example, you could give up to £8,000 to one of your children when they getting married.
