Child savings tax-allowance confusion...

You are correct in saying that the £100 interest per year, per adult I should add making £200 in your case, creates the situation where HMRC expect you to keep records of every gift you and your partner make to your child and ensure that the interest in a tax year from those gifts, excluding gifts from other people and genuine income of the child, is less than £100.
The idea that people would do these calculations considering that rates change quite regularly is ridiculous and the answer is to do one or both of the following.

1. Create a separate account with another family member as trustee into which all income not from you or your partner is placed. This can generate more than £100(£200) interest a year as the rule does not apply.

2. Whenever the balance in the account run by the parents grows to the level where the interest would be more than £100(£200) withdraw the excess and put it into tax free savings such as NS&I Index Linked Savings Certificates or Children's Bonus Bonds in the child's name with a parent as trustee. These are exempt from this rule but unfortunately the rates are currently not very good.

I would assume that if you transferred the excess in option 2 to another account in the child's name which was not exempt and HMRC ever investigated your finances you would be in trouble. As far as I know HMRC does have the power to request balances on child's accounts and theoretically could detect tax evasion in this way.

Here is the link to HMRC site mentioning the rule http://www.hmrc.gov.uk/tdsi/children.htm#b
the odd thing is that the example they give does not agree with how some building societies treat child's accounts. It makes out that organisations would be forced to pay interest net of tax and then only those with less than £100 gross interest would be able to claim the tax back. :rolleyes:

Although it does not mention it, I take it to mean that the interest on the account, if less than £100 in a year, is paid to the child and so the future interest on that interest is theirs too and not included in later calculations.:rolleyes:

Beeblbrox wrote: »

1) I inferred from that, that he could quite safely earn up to that amount a year in interest before having to worry about tax (with the R85 form) ...

2) - is that correct? If so how do we go about making clear the distinction between money given by us and money given by others in the one account and the interest earned on each amounts and so on?

1) Wrong inference, I'm afraid. Most children's accounts still require you to file an R85 in order to attain gross interest. No one, generally, gets gross interest solely because the interest is under the personal allowance figure. You have to declare you are not liable to have tax deducted ..... by signing the declaration on the R85.

2) You have to maintain a basic record. I've never known HMRC to react at the £100 threshold ..... their 'risk' level to examine such accounts will be set at a much higher level. It's not Muppet legislation at all ..... it's there to stop parents masking their own funds within the accounts of their children. It's legitimate to do it with your spouse ..... but not to extend it to your children.