From 2027, your unused pension funds will form part of your estate for Inheritance Tax (IHT) calculations. (You’re no doubt aware of this already – we first wrote about it back in 2024 when the change was first announced.)
One way to mitigate a potential IHT bill is to lower the value of your estate through gifting to children or grandchildren. Done in the “right” way, this can be tax-efficient for you and provide your loved ones with a stable financial start in life – a real win-win!
With the changes now less than a year away, you might look to a Junior ISA (JISA) as one way to provide a nest egg for a child or grandchild.
Keep reading for a look at why this might be a good option for you and the alternatives available.
Contributing to a Junior ISA could provide a tax-efficient nest egg and valuable financial lessons for your loved one
As with adult ISAs, JISAs are incredibly tax-efficient. There is no tax to pay on interest earned in a Cash JISA, and gains from a Stocks and Shares JISA are free of Income Tax and Capital Gains Tax (CGT). The JISA Allowance for 2026/27 stands at £9,000, and you can’t carry forward any unused amount.
A JISA can be opened by a parent or guardian as soon as a child is born, and anyone can contribute on that child’s behalf. The child can take control of their account from age 16 and withdraw money from age 18. If they don’t withdraw their money, the account will transfer to a full adult ISA with the full £20,000 annual ISA Allowance.
If you’re worried about what will happen to your money once the child reaches adulthood, remember that the JISA provides valuable lessons on the concepts of saving, investing, and compound returns.
It’s worth noting, too, that according to IFA Magazine, just 6.5% of JISA holders empty their accounts at age 18.
Gifting the full £9,000 allowance to each of your eligible children or grandchildren each year could provide them with a significant sum by the time they reach 18, helping them to begin adult life with financial security, while providing valuable money lessons.
You might make use of HMRC allowances to ensure gifts are tax-efficient from the moment they are made
You can give as many gifts as you like during your lifetime, but these will generally be considered potentially exempt transfers (PETs). This means they will potentially be subject to IHT on your death if you die within seven years of the gift being made.
Death within three years will usually result in IHT being payable at the full rate of 40%, while death between three and seven years is chargeable on a sliding scale known as taper relief, but only for much larger gifts in excess of the nil rate band.
Some gifts, though, are IHT-free the moment you make them and could be used to lower the value of your estate while contributing to a JISA, or another tax-efficient vehicle such as a pension.
Annual exemption
You can gift up to £3,000 IHT-free in the 2026/27 tax year and carry forward any unused amount from the previous tax year. What’s more, the limit is individual to you, so you and your partner could gift up to £12,000 this year if neither of you has used any of your 2025/26 exemption.
Normal expenditure out of income exemption
If you want to make regular contributions to a child’s or grandchild’s JISA or pension, you might consider using the normal expenditure out of income exemption. This allows you to make regular gifts if you can prove that:
- The money comes from your regular surplus income
- The regular gift is part of your normal outgoings
- Giving the gift doesn’t harm your standard of living.
Accurate record-keeping is key here, as you might need to prove to HMRC that your gifts meet these criteria.
Alternatives like pensions are also tax-efficient, and you might even be tempted to pay off a student loan
The above exemptions could also be used to make regular pension contributions on behalf of a child or grandchild. While the pension’s Annual Allowance for adults stands at £60,000, you can make contributions into a child’s pension of up to £2,880 a year, topped up to £3,600 thanks to government tax relief.
As with JISAs, early pension saving provides valuable financial lessons that can last a lifetime and provide a nest egg that will hopefully compound and grow over the next 60 years or more.
You might also consider using your wealth to help your loved ones by paying off a student loan, providing a house deposit, or paying off high-interest debt.
There will be pros and cons to any options you choose, so be sure to take financial advice before you make any big decisions.
The win-win of giving with a warm hand to tax-efficiently benefit your loved ones now
Gifting during your lifetime rather than in your will has several financial and non-financial benefits.
You can gift tax-efficiently to lower the value of your estate and reduce a potential IHT bill on death. By choosing tax wrappers like pensions and JISAs, you can ensure your gift is tax-efficient for your loved ones too.
Earlier gifting increases the chance of living for seven years, at which time PETs become IHT-free. You might also find that your recipients receive the money at the time when they need it most – when starting higher education, looking to get on the property ladder, or starting a family, for example.
What’s more, you’ll be around to see the difference your money makes.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning.
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