Every week we take a look at what’s happening in the savings market with the help of experts at The Private Office. Today we are running a special edition with the help of chartered financial planner April Leeson, explaining how you can reduce your inheritance tax liability and set up your child’s financial future.

Trying to minimise the amount of inheritance tax our loved ones need to pay in order to keep more of our wealth in the family has long been a priority for many.

But frozen allowances and the changes to inheritance tax (IHT) on pensions coming in April 2027 mean more people than ever are looking at ways to keep as much of their estate as possible out of the taxman’s hands.

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At the same time, younger generations face increasing financial pressures. Rising house prices, student debt and the wider cost of living mean many parents and grandparents are looking at ways to provide support sooner rather than later.

Here Leeson explains some of the ways that you can tackle both of these problems…

Gifting and Junior ISAs

Around £17bn is gifted or loaned informally each year and almost all of it is from parents to their adult children, according to the Institute for Fiscal Studies.

Gifting during your lifetime offers two key advantages – you can see the positive impact your support has on children and grandchildren, and you may reduce the value of your estate for IHT purposes.

“Of course, it should be remembered that less than 5% of estates are currently subject to IHT and although that number is expected to rise with the upcoming changes to pensions as well as ongoing frozen tax allowance, it’s worth checking if you have a potential liability before making any plans simply for IHT purposes,” Leeson said.

How you choose to gift the money depends on several factors, including your own financial security, the age of the recipient and whether the money is for immediate use, perhaps as a deposit for a home, or whether you would prefer to invest it for their future.

If it’s the latter, by starting early and being as tax efficient as possible, it is staggering what a difference you can make, Leeson said.

For example…

If you could save £9,000 per year into a Junior ISA (JISA) from birth until age 18 (£162,000 in total), and the investments achieved growth of 5% per annum, the child could have almost £266,000 available at age 18.

If those funds were then left invested within an adult ISA until age 57, the age that they will be able to access a private pension, even without any additional contributions, the value could potentially grow to almost £1.8m

Don’t forget about children’s pensions

“Although it may seem like a crazy idea to put money aside for their retirement when they are very young, helping children establish long-term savings early in life could significantly improve their future financial security and flexibility, particularly at a time when many younger people struggle to prioritise retirement planning,” Leeson added.

You could do this by putting money into a Junior Self-Invested Personal Pension (Junior SIPP) – again, by doing this, you may reduce the value of your estate for inheritance tax purposes.

Junior SIPPs are tax-efficient savings accounts that can be opened for a child under 18 by a parent or legal guardian.

Other parties such as grandparents can make contributions.

When the child turns 18, they take control of the account, but they cannot access the money until they are 55 (this is rising to 57 from 2027).

One of the tax benefits for those paying into the account is that they can pass money free from inheritance tax.

You can contribute as much as £2,880 into a junior SIPP each tax year. The government then applies basic 20% pension tax relief, adding £720 if you make the full contribution.

Leeson explained: “Assuming 5% annual growth until age 57, and no further contributions after age 18, the child could have access to a pension fund worth around £737,000.

“Better still when the child is old enough to make their own contributions to a pension, assuming a 5% personal contribution from age 30 and matching employer’s contributions for someone earning £30,000 a year, the total pension at age 57 could be over £905k. Adding in the JISA/ISA investment, that’s a cool £2.69 million.

“Even if you assume inflation will take 2% of the return each year, your child could still have the equivalent of more than £1 million in today’s terms, when they reach 57 years old.”

Read more:
Is it time to get on the ‘savings laddering’ trend?
Why now is the time to ditch and switch your savings account
How to set your baby up to be a millionaire

What about adult pensions?

Pensions have long been viewed as an efficient way to pass wealth to future generations. However, proposed changes from April 2027 mean pension assets could become subject to inheritance tax.

Therefore, many people are considering gifting from pensions during their lifetime instead of simply leaving it to be passed on after their death.

“This could be a simple lump sum gift. But another tax efficient way is to gift money into a pension for children or grandchildren. This reduces the size of their own pension – and therefore the value of the estate potentially subject to IHT,” Leeson said.

“Better still, if drawing the pension means these contributions come from surplus income, they may also qualify as an ‘exempt transfer from normal expenditure out of income’, meaning the money could immediately fall outside the estate without the need to survive seven years.”

(We’ll have more on this seven-year rule in a moment.)

There is, however, a trade-off.

“The grandparent/parent may pay income tax on the withdrawal, potentially at 20%, 40% or 45% depending on their marginal rate. But the child receives tax relief on the pension contribution (depending on their marginal rate), helping offset some of that cost,” Leeson added.

“From an intergenerational planning perspective, this can be a very efficient way of passing wealth down the family while mitigating future IHT exposure, as the money leaves your estate but continues to grow tax efficiently within the child’s pension.”

Watch: Is it time to prioritise young people over pensioners?

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Lifetime gifting can help – but you need to know the rules

Lifetime gifting can reduce the value of your estate for inheritance tax purposes, benefitting both parties.

For example, contributing £9,000 into a JISA and £2,880 into a pension each year would reduce your estate by £11,880 each year.

If those funds had remained within your estate and were subject to IHT at 40%, this could mean a potential inheritance tax liability of £4,752.

However, with most gifts from savings or capital, you need to live for seven years before that gift is no longer subject to IHT.

If you gift money today and survive three years, the rate of IHT on the gift will start to reduce, year by year, until the IHT is wiped away after seven years and the gift is no longer in your estate, saving 40% on the value of the gift.

This is known as taper relief, and you can read more about it in our guide here.

If you die within the first three years, your nil rate band will be reduced by the amount of said gift, meaning it won’t actually help to reduce your liability.

Depending on the type of gift, the IHT liability can be charged to the recipient of the gift. Therefore, it’s a case of the earlier the better when gifting larger sums.

Four ways to cut value of your estate

Despite this, there are several ways to remove money from your estate immediately:

Annual exemption: You can give away up to £3,000 each tax year (your annual exemption), either to one person or to several, without it forming part of your estate. Any unused allowance can be carried forward for one tax year only.Small gift allowance: You can give as many gifts of up to £250 per person as you wish each tax year, provided no other allowance has been used on the same person.Gifting from normal expenditure: Regular gifts made from surplus income can fall immediately outside your estate, provided they do not affect your standard of living. The gifts need to come from income such as dividends, salary, pension or savings interest rather than capital, so clear record-keeping is essential to prove gifts qualify under this exemption.Wedding gifts: You can also make tax-efficient gifts in anticipation of marriage or civil partnership, with allowances of between £1,000 and £5,000, depending on your relationship to the recipient.

A gift that could last generations

“Passing wealth to the next generation is about far more than tax efficiency alone. Done thoughtfully, gifting can help children and grandchildren establish long-term financial security much earlier in life, while potentially reducing the inheritance tax burden on your estate,” Leeson said.

“But it’s essential to make sure that you can afford to gift that money and that it will not be required later down the line. This is where sound financial advice can make all the difference.

“Personalised planning can help you map out your future goals for yourself and your family, helping you visualise what is realistic and achievable.

“After all, many of us would rather grow our money for our families and future generations than grow the tax bill payable on death.”