Funding their future
Offering financial help to your children appeals to a lot of parents but it’s crucial this is done in the correct way to avoid any unintended tax consequences, says Julie Bloodworth, Partner at Rawlinsons
The income of children is taxable on them, regardless of age. They qualify for the standard personal allowance. You can make a gift to your child but if they are under 18 the interest generated from that gift needs to be less than £100 for each child from each parent in order to be taxed as the child’s. If the income exceeds this limit, the whole amount, and not just the excess over £100, will be taxed as if it were the parent’s income, where the child is under 18 and unmarried. There are certain investments where this ‘£100 rule’ does not apply.
Opening a children’s bank or building society account is an easy way of saving money for your child. They are set up with the child’s name linked with the name of the parent. The parent has control of the account until the child reaches a specified age. Junior ISAs, available to individuals under 18 who do not have a Child Trust Fund, allow an investment of up to £4,128 during the tax year ending 5 April 2018. Withdrawals are not permitted until the child reaches 18. Child Trust Funds were set up by the Government for children born between 31 August 2002 and 31 December 2010. Contributions can bemade up toamaximum of £4,128 in the current tax year. Growth in the fund is tax-free and the £100 rule does not apply. National Savings children bonds offer a maximum holding per child of £3,000 for each issue. All returns are exempt from tax, and the £100 rule does not apply. Premium Bonds can also be bought for a child under 16.
There are Inheritance Tax (IHT) consequences of making gifts. In every tax year, each individual may give up to £250 to any number of people, plus further larger gifts up to £3,000 in total. Regular gifts made out of income are not subject to IHT, and there are special allowances for gifts given in consideration of marriage. Most other gifts rank as potentially exempt, becoming fully exempt if the parent survives for seven years. Instead of gifting to children outright some people prefer to use a more formal trust arrangement to protect the capital. A gift into an interest in possession or discretionary trust has various tax implications and advice should be sought if you are considering this as an option.
Parents can pay up to £2,880 a year into a personal pension on behalf of a child under 18. The contributions are paid net of basic rate tax, which is retained in the pension whether or not the child is a taxpayer. If you have a child in higher education you could help them to buy a house in the student area. Your children can live there and should be able to cover most of the costs by renting rooms to other students. If the property is bought by the student, not the parents (and many lenders will offeramortgage to a student if the parent acts as guarantor) the eventual sale may be free from capital gains tax. You can also help your children onto the housing ladder in a tax-efficient manner by giving them money to open a Help to Buy ISA available from age 16 or a lifetime ISA from 18, both of which offer substantial tax incentives. The strict rules that apply to gifts from parents do not apply in the same way to gifts from grandparents, who are very often more than happy to support their grandchildren.
Rawlinsons Chartered Accountants 01733 568321, www.rawlinsons.co.uk Email Julie Bloodworth for further information at