Are gifts of savings being made to reduce inheritance tax, protect assets or simply to get the best risk-adjusted return? Choosing between buying Premium Bonds for a child or funding a Junior ISA (JISA) is a common tactic in UK gift planning. The correct choice depends on tax rules, ownership, liquidity needs and the donor's long-term estate plan.
This guide focuses exclusively on Gift tax planning: Premium Bonds vs funding a JISA, setting out clear differences, practical steps, and realistic examples so a reader can decide which route suits their gift and wider inheritance tax (IHT) strategy. All figures are indicative at time of writing (Feb 2026).
Key takeaways: what to know in one minute
- Ownership matters for IHT: gifts that are immediately and irrevocably owned by the child are typically treated as potentially exempt transfers (PETs) for IHT; surviving seven years removes IHT exposure.
- JISAs are tax-efficient and owned by the child: income and gains in a JISA are tax-free and the account is usually treated as a gift to the child for IHT purposes.
- Premium Bonds are low-risk but returns are random: there is no interest tax to declare if bonds are held in the child's name, but prize structure is probabilistic and the expected return is indicative.
- Annual allowances and exemptions change outcomes: use the £3,000 annual exemption and small gifts rules correctly to reduce IHT exposure immediately.
- Documentation and naming matter: registering ownership clearly and keeping receipts, statements and dates is essential when gifts are part of IHT planning.
How gift tax rules affect Premium Bonds
Premium Bonds issued by National Savings & Investments (NS&I) are typically bought and registered in the name of the person who will legally own them. For gift planning this matters:
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If Premium Bonds are bought and registered in the child's name, the purchase is generally treated as a gift to the child. That gift is a potentially exempt transfer (PET) for inheritance tax: if the donor survives seven years the value is excluded from the donor's estate for IHT purposes. If the donor dies within seven years, the gift may be included in the estate subject to taper relief rules. For official guidance see HMRC on gifts.
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If Premium Bonds are bought and held in the donor's name but the donor intends that the child benefits, the donor retains legal ownership. That creates estate exposure: the bonds form part of the donor's estate on death and are not treated as a gift for IHT purposes.
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NS&I prizes are not taxed at source and prizes won by a child registered as the owner are not taxable income for the parents. However, for IHT purposes the registration date and evidence of transfer matter: keeping the purchase receipt and registration confirmation is essential.
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Some donors attempt to retain control while allowing a child to benefit (for example, holding bonds in a custodial capacity). Such arrangements are risky for IHT planning because HMRC will generally treat the asset as belonging to the donor unless legal ownership passed.
Practical note: always register Premium Bonds in the name of the intended owner on completion of purchase if the aim is to treat them as a gift.
Using a JISA for tax-efficient gifting
A Junior ISA (JISA) is an individual account that must be opened and held for a qualifying child (under 18). Key points for gift planning:
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Ownership and tax: A JISA is registered in the child's name. Income and capital gains within a JISA are tax-free. Contributions by parents, grandparents or others are gifts to the child and are usually treated as PETs for IHT unless they fall under an exemption.
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Control and access: The child gains full access to the JISA only at age 18, when the account automatically converts to an adult ISA. Until then, the account manager and contributors cannot withdraw funds on the child's behalf (except via the scheme rules). This creates a clear transfer of ownership, which is beneficial for IHT planning because the asset leaves the donor's estate once gifted.
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Contribution limits: JISA subscription limits are set annually (check the current HMRC limit). Use multiple years' allowances carefully — the annual subscription is the maximum that can be contributed to a JISA in each tax year.
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Investment options: A JISA can be a cash or stocks-and-shares account. For growth objectives, a stocks-and-shares JISA historically offers higher expected returns over the long term but carries market risk.
For practical opening steps, refer to GOV.UK: Junior ISAs.
Comparing tax-free returns: JISA vs Premium Bonds
Understanding expected returns, variability and tax treatment is central to gift tax planning.
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Premium Bonds: returns are paid as prizes; there is no interest. The prize fund rate quoted by NS&I is a headline equivalent, but individual outcomes are random. For gift planning it is useful to consider the expected value (average return over many bonds and many draws) rather than any single prize. Prizes are non-taxable when the bonds are registered to the child.
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JISA (stocks and shares): returns (dividends and capital gains) inside a JISA are tax-free. Over long horizons a low-cost global equity fund might deliver an indicative 4–6% nominal annual return after fees (historic data—not guaranteed). Cash JISAs will have lower returns but predictable interest.
Indicative comparison example (for illustration only):
- Scenario A: £1,000 invested each year for 10 years.
- At 3% annual (representative of an average Premium Bonds EV), future value ≈ £11,464.
- At 5% annual (representative of a modest equity JISA), future value ≈ £12,578.
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Difference after 10 years ≈ £1,114 in favour of the JISA scenario.
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Scenario B: £10,000 lump sum for 10 years.
- At 3%: ≈ £13,439.
- At 5%: ≈ £16,289.
- Difference ≈ £2,850.
These figures are illustrative and indicative at time of writing. The benefit of a JISA for gift planning is the combination of tax-free compounding inside the ISA wrapper and clearer ownership that helps remove assets from the donor's estate for IHT once the gift is made.
However, the Premium Bonds proposition offers capital security and instant liquidity (prizes can be cashed quickly), and no product fees. For short horizons or for families that value capital security and the chance of large tax-free prizes, Premium Bonds can be attractive despite lower expected returns.
Impact on inheritance tax and estate planning
Key IHT rules affecting gifts into Premium Bonds and JISAs:
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Potentially exempt transfers (PETs): most outright gifts to another individual (including a child) are PETs. If the donor survives seven years, the gift falls outside their estate for IHT. Document the transfer date and evidence of the transfer (purchase/registration) to support IHT treatment.
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Gifts from normal expenditure out of income: regular gifts that are part of normal expenditure and do not reduce the donor's standard of living may be immediately exempt. This route can be used for smaller regular contributions to a child’s account but must meet strict criteria and be well documented.
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Annual exemption: each donor has an annual IHT exemption (currently £3,000 per tax year, check with HMRC for updates). Unused annual exemption can be carried forward one year. Smaller gifts up to £250 per recipient may be exempt as well.
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JISAs and immediate ownership: because a JISA is registered in the child's name and the child cannot be dispossessed of the money by the donor, a JISA contribution is usually considered an outright gift (a PET). That makes JISAs a robust vehicle for removing value from an estate once the gift date is recorded.
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Premium Bonds registered in child's name: similar treatment as a JISA — they are ordinarily PETs if registration completed. If the donor retains registration or control, IHT exposure remains.
Practical estate planning checklist:
- Register the asset in the recipient’s name at purchase.
- Keep purchase confirmation and statements with dates.
- Use the annual exemption where appropriate and track carry-forward use.
- Consider combining approaches: part in a JISA for growth and long-term IHT reduction; part in Premium Bonds for liquidity and prize potential.
For HMRC guidance on IHT and gifts see HMRC guidance on gifts and inheritance tax.
Annual gift allowances and the seven-year rule
Understanding these allowances is central to planning:
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Annual exemption: currently £3,000 per donor per tax year. Use it each tax year to transfer value without forming PETs that consume the seven-year clock. Unused allowance can be carried forward for one tax year.
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Small gift exemption: gifts up to £250 per person per tax year are exempt provided another exemption (like the annual exemption) is not used on the same recipient.
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Seven-year rule and taper relief: PETs become exempt from IHT if the donor survives seven years. If death occurs within seven years, taper relief reduces the IHT payable on the gift after two years (subject to conditions).
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Gifts into trust: avoid making gifts that retain benefit for the donor. If a trust is used, different trust IHT rules may apply and specialist advice is advisable.
Application to Premium Bonds and JISAs:
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Use the annual exemption to make small transfers each tax year into a JISA or buy Premium Bonds in the child’s name. That reduces the need to rely on the seven-year survival rule.
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Record dates and evidence carefully: the seven-year clock is measured from the date of the gift, which in savings transfers is usually the purchase date and registration confirmation.
Liquidity, prizes and returns: Premium Bonds explained
Premium Bonds are a popular choice because they combine capital security with a chance of tax-free prizes:
- Liquidity: bonds can normally be cashed at short notice and redeemed at face value.
- Prizes and probability: the prize system replaces interest. Prizes are tax-free for the registered owner. Because prizes are random, many small holders will experience lower than average returns while a few receive larger prizes.
- No platform or management fees: unlike some funds inside a JISA, Premium Bonds carry no ongoing management fee, though the effective expected return can be lower than taxed and fee-adjusted returns from other assets.
For current prize fund rates and operational detail consult NS&I.
Practical comparison table
| Feature |
Premium Bonds (child owner) |
JISA (child owner) |
| Ownership |
Legal owner is child if registered as such; treated as gift (PET). |
Account in child’s name; immediate gift for IHT purposes. |
| Tax on returns |
Prizes are tax-free for the registered owner. |
All income and gains inside the JISA are tax-free. |
| Liquidity |
High: bonds redeemable quickly. |
Varies by provider; generally accessible but control falls to the child at 18. |
| IHT treatment |
PET if registered to child; seven-year rule applies. |
PET if registered to child; seven-year rule applies. Clear title often helps. |
Process flow for gift planning
Gift planning flow: Premium Bonds vs JISA
1️⃣Decide objective → Growth (JISA) or capital security + prizes (Premium Bonds)
2️⃣Choose ownership → Register child as owner to create a gift (PET)
3️⃣Use exemptions → Apply annual £3,000 exemption or small gifts rule where suitable
4️⃣Record everything → Keep receipts, registration confirmation and statements
✅Outcome → Asset outside estate after 7 years (PET) or immediately if covered by exemptions
Advantages, risks and common mistakes
Benefits / when to apply
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- Use a JISA for long-term growth and IHT reduction: when the aim is to remove value from the donor's estate and allow tax-free growth, a stocks-and-shares JISA is typically superior.
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- Use Premium Bonds for capital security and liquidity: when the donor prefers low risk, instant access and a chance of prize, Premium Bonds are appropriate.
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- Combine both: split a gift between a JISA (growth) and Premium Bonds (liquidity / prize chance) to match competing goals.
Errors to avoid / risks
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- Failing to register ownership: buying bonds in the donor's name or failing to complete JISA paperwork can leave assets inside the estate.
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- Poor documentation: lack of purchase records undermines IHT arguments.
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- Overreliance on prizes: Premium Bonds returns are probabilistic—do not count on big prizes for a plan dependent on a certain value.
Frequently asked questions
Are Premium Bonds exempt from inheritance tax if bought for a child?
Yes, if Premium Bonds are bought and registered in the child's name they are usually treated as a gift (a PET). If the donor survives seven years the bonds fall outside their estate. Keep the purchase confirmation as evidence.
Funding a JISA is generally considered an outright gift to the child and is treated as a PET. If the donor survives seven years the gift is excluded from their estate; some gifts may qualify as exempt if they meet the normal expenditure rules.
Who pays tax on Premium Bonds prizes for a child?
Prizes are tax-free for the registered owner. If the child is the legal owner of the Premium Bonds, prizes are not taxable income for parents.
Can grandparents use the annual exemption on JISAs and Premium Bonds?
Yes. Each donor (including grandparents) has their own annual exemption (£3,000). Donors should record contributions and track exemptions carefully.
Is a JISA better than Premium Bonds for long-term saving?
For long-term growth a stocks-and-shares JISA typically offers higher expected returns but with market risk. Premium Bonds offer capital security and prize potential but lower expected returns.
What if the donor dies within seven years of making the gift?
If the donor dies within seven years a PET may be subject to IHT. Taper relief can reduce the tax payable if death occurs more than two years after the gift. Accurate records are important.
Can gifts be structured to avoid IHT without using the seven-year rule?
Yes: gifts that qualify under the normal expenditure out of income rules or using the annual and small gift exemptions can be immediately exempt. Professional advice is recommended for larger transfers.
Your next step:
- Check ownership: ensure Premium Bonds or a JISA are registered in the child's name and keep all confirmations.
- Use exemptions: apply the annual £3,000 exemption and small gifts where appropriate and document each gift.
- Combine and plan: consider splitting funds between a JISA for growth and Premium Bonds for liquidity; consult a solicitor or tax specialist for complex estates.
Alan White
With over 15 years of experience helping individuals navigate savings and investment options, this author provides clear, practical guidance on ISAs, Premium Bonds, and alternative savings products. Every article on ISA vs Premium Bonds draws on real-world experience, offering actionable advice, risk awareness, and strategies to help readers make informed decisions, plan for savings goals, and understand tax and legal implications. The goal is to empower readers to confidently manage their money and maximise their financial growth.