Building for the Next Generation: Part 3
Key takeaways
The right structure depends on the family’s circumstances
Funding method, tax profile, citizenship, residence and future plans can all influence which option is most appropriate.
Tax and investment considerations need to be assessed together
UK inheritance tax, US gift tax and the tax treatment of underlying investments can all affect the suitability of an arrangement.
Regular reviews are important
Changes in residence or family circumstances can affect the tax efficiency and suitability of a structure over time.
In part 2 we looked at the UK and US tax rules. Now we look at the practical considerations.
Finding the right fit
The suitability of each structure will depend on five key planning considerations.
1. How will the arrangement be funded?
One of the first decisions is whether to contribute cash or existing investments. Cash contributions are generally straightforward, and it’s the only option for JISA. However, transferring existing investments may create tax consequences.
For example, a UK-resident parent moving appreciated investments into a structure for a child may trigger a capital gains tax disposal at market value even though no cash is received.
The tax cost of funding should therefore be considered alongside the investment strategy.
2. What are the US gift tax implications?
Funding a UTMA generally constitutes a gift for US gift tax purposes. For 2026, individuals can generally make gifts of up to $19,000 per recipient each year without using their lifetime exemption. Larger gifts may require gift tax reporting and reduce the donor's available lifetime exclusion amount. The existence of a reporting requirement does not necessarily mean tax is payable, but it should not be overlooked.
3. What are the UK inheritance tax implications?
Gifts to a bare trust, a Junior ISA or a Junior SIPP are generally Potentially Exempt Transfers (PETs). If the person making the gifts survives seven years, the gift falls outside their estate entirely. If they don’t, the gifts are added back, although taper relief can reduce the tax if the donor lives beyond three years.
Some exemptions work immediately:
- The annual exemption of £3,000 (with one year of unused allowance carried forward).
- Regular gifts out of surplus income, which have no upper limit if the conditions are met and good records are kept. Regular JISA or Junior SIPP contributions often fit here neatly.
- Small gifts of up to £250 per person.
4. Are the underlying investments tax-efficient?
The structure is only part of the analysis. The underlying investments can create their own cross-border tax challenges, and US and UK rules can pull in opposite directions. The whole argument with UK Reporting Funds and PFICs may still exist.
5. What happens if the family moves?
Many children will live in more than one jurisdiction before gaining control of the assets. A structure that appears efficient today may become far less attractive following a future move.
A child who leaves the UK, for instance, may no longer be able to keep paying into a JISA, and the tax treatment of the existing account in the new country of residence is a separate question. Regular reviews are therefore important.
Choosing the appropriate structure
There is no single structure that is appropriate for every family.
For a UK-only family, the tax-advantaged wrappers (JISA or Junior SIPP), may come first as it could potentially be the simplest way to build up money, with a bare trust for anything beyond those limits.
For a family with US ties, this can flip. A UK wrapper may shelter nothing from US tax, and a US-based structure may not work for a child who is UK resident.
When you are looking at a structure make sure you think about these things:
The family's objectives.
- Timescales.
- Tax profile.
- Citizenship.
- Residence.
- Investment preferences.
- Desired level of control.
The key question is not whether any particular structure is "good", but whether it aligns with the family's wider planning goals.
Bringing it all together
UTMAs, bare trusts, Junior ISAs and Junior SIPPs can all be highly effective tools for passing wealth to the next generation. However, they should not be viewed purely as investment accounts.
Ownership, taxation and investment strategy are closely interconnected. For families with UK and US connections, the most successful outcomes typically arise when those issues are considered together rather than in isolation.
By understanding the structure, tax treatment and practical planning considerations, families can make more informed decisions about how best to invest for the next generation
Glossary
Potentially Exempt Transfers (PETs): Gifts that may fall outside the donor’s estate for UK inheritance tax purposes if they survive for seven years after making the gift.
Capital gains tax: A tax that may arise when an asset has increased in value and is disposed of or transferred.
Taper relief: Relief that can reduce inheritance tax on certain gifts if the donor dies more than three years after making the gift.
This material is provided for informational purposes only and does not constitute investment advice or a recommendation. The views expressed reflect current market conditions and are subject to change without notice.
All materials have been obtained from sources believed to be reliable, but their accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may rise as well as fall, and investors may not get back the amount originally invested. Capital security is not guaranteed.
