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[MSE Martin]

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My child has just turned 2 years old. She now has almost £3000 in cash savings. Most in a Halifax child account and around £800 in Nationwide.
Each parent has a control of one account.
After reading the section of your article about being taxed after £100 interest i want to know what the best option is for us to avoid the tax.
I pay £50 per month into the Halifax account and the rest has been made up from birthdays etc...

A few questions...

Should i get a grandparent to open an account to avoid the tax ?

Is it ok for me to direct debit into this account without paying the tax on interest over £100.

Is there a limit on how much can be paid to a child in one year ?

Thankyou,
Tom.[sup][/sup]

[MSE Martin]

The key here is the tax situation. The first thing to remember is it is £1900 from each parent and it also depends where your account is from.

You should first of all make sure any money that wasnt from you is accounted for - eg how much of this is from grandparents etc

The other thing to check out is you can use National Savings Childrens bonds in addition for tax free savings that don't impact these limits.

Martin

So £1900 from each parent is the max we can pay in.

Even though he money from other people can be accounted for, how can this be proved ?

Only problem with the NS bonds are the low interest rates.
But i suppose this is better than paying tax on interest ?

[isasmurf]

Even though he money from other people can be accounted for, how can this be proved ?

As the way things currently stand its for you to prove that it is from other people, not for the taxman to prove it isn't. I know it's stupid and should be up to them to prove that it came from you, but hey that's life.

Also, bear in mind the figure you are allowed to put in depends entirely on the interest rate, as it's the interest that's at question here not what you put in. Martin was quoting the maximum amount for the A+L ChildSaver account as this pays the best interest at the moment.

Children, aged 5 and 2 years, have each inherited £5k from grandfather which has to be invested and not made available until aged 18 years. A and L offer sounds attractive but would it still be possible if I needed to move the money to another provider in the event of a better offer coming on stream. Is there a better no risk home for this money?

[quinlanmd]

5.65% Derbyshire Regular Savings account should be considered by those looking to save regularly for their children/young relatives. (Obviously unsuitable for those needing regular access or just depositing lump sums).

[Milarky]

Would opening an ISA for your child and funding this - rather than an normal savings account - have any bearing on the question of how the resulting income [were it over £100] be taxed?

AFAIK, you (your child et al) are specifically exempted from reporting ISA-generated income. It is meant to be completely 'Tax-free'. If your child has an ISA, he/she does not need to tell the taxman [would that be 'tax-official' to be PC?]. How can 'tax-free' income - which it is not required to report to the Inland Revenue - give rise to a liabilty against someone else?

[DiggingOut]

I believe children cannot have ISAs.

<edit>
Children CAN have stakeholder pensions, and this is a very tax-efficient way to save for your children, though obviously they can't use it for a very long time. But if they have a nice start on a pension, it will free them from that pressure when they are starting out on their own.

Obviously, you can't access the funds yourself, either.

[Galstonian]

You're correct, you cannot open an ISA for a child, I think 16 is the minimum age.

As for pensions, its something to think about but I would suggest that most children would prefer help with a first car or house, further eduation or even something for their first child rather than a pension. Will they even see pensionable age? Will pension law be changed between now and their retirement? (pretty much a certainty I'd say).

Anyway, the article is about using additional tax relief, not about saving for children as such, perhaps something for Martin to tackle in future?

[DiggingOut]

Oh, come on, Galstonian, be blunt and say what you mean:

"DiggingOut, you've been a bad boy and gone off topic." ;D

[SPL]

I really want to open accounts on behalf of my godchildren - just ten pounds a month for a set number of years - does anyone have any suggestions for the best way to do this to benefit them?

Thank you

[Milarky]

You cannot open an ISA for a child, I think 16 is the minimum age.

Thankyou - I'd forgotten that. This shows how 'funny' HM Taxes are, though. You cannot save into a relatively effective - and 'basic' type of account [a mini cash ISA] until you are 16, but you can 'fund' a contingency like retirement through a stakeholder pension as soon as you are born !:P

Yes, children will have access to something comparable to an ISA - the Child Trust Fund, into which about £1200 pa can be added, I believe. This becomes availabe at 18.

Personally, I think that the one 'good' policy the Tories came out with at the last election [knowing they would never have to implement it!] was to propose scrapping tax on all savings accounts. Life would be so much simpler for savers.

ISAs [off-topic, still, I know] don't pay the best rates of interest, as we know, even though the paperwork for administering must be minimal. If there was no tax on savings accounts these distortions would disappear.

Anyway, a question! Money paid as 'pocket money'? How much could a parent get away with 'paying' their child for chores and still not fall foul of the £100 rule? Remember that Martin's £1900 or so isn't repeatable, since it would raise £100 each year. Once the child's savings exceeded £2000, their parents would become liable - even for money put in their child's name some years earlier. My 'theory' is that if you employ your child they can offset taxable income against their own annual allowance. The only issues I can see here are:

1) Child does not really perform work - so not a geniune payment, and would have to be shown otherwise
2) Law denies child the right to work [but, !perversely not a tax allowance] until a certain age, and with restrictions where some work is allowed.

[foxfield]

What about the childdren's alowance. If this is not used except to be put into an account in the child's name is it seen as money from the parent and therefore subject to the £100 rule for interest

[Splats]

We have recently opened a A+L first save account (mentioned in Martin's article) for our son. He received several cheques as gifts for his Christening but when we tried to pay them in we were told we could only pay in five per day. Has anyone else come across this? Could anyone explain why? The casheir at the branch we used could not shed any light on this, and refused to hold onto the other cheques to pay in the next day.

Also, what constitutes proof to the taxman when showing that monetry gifts paid into the account are from relatives???

[dealseeker]

National Savings Children's Bonus Bond
Haven't seen this mentioned anywhere.

This product can increase your tax free savings for each child and you can take out further invesments on each new issue so adds significantly to the c.£1,900 included in Martin's article.

Obviously being National Savings backed your capital is also 100% secure and tax free rate of 4.7% is fairly competitive.

Only issue is that you have to hold the bond for 5 years to get the bonus but still useful particularily for higher rate tax payers looking for a tax free haven for their cash.

Details below and link to NS&I

http://www.nsandi.com/products/cbb/i...ection=details

You can invest from £25 to £1,000 in each Issue of Children's Bonus Bonds, in units of £25. Each time we bring out a new Issue, you can invest up to its maximum limit.

Children's Bonus Bonds are owned by the child. But until they reach 16 the Bond is 'controlled' by their parent or guardian regardless of who bought it.

This means only the parent or guardian can cash in the Bond, but the money still belongs to the child.

Normally, if a parent gives their child money to invest, the parent is liable to tax on the interest if it comes to over £100 in any tax year, even if the child isn't a taxpayer. But with Children's Bonus Bonds the interest and bonuses are all completely free of UK Income Tax. Even if the child starts work and becomes a taxpayer before cashing in their Bonds, they still won't have to pay tax on the interest.

To qualify for bonuses, Bonds have to be held until a five-year anniversary or until the child is 21. However, if the bondholder needs access to the money earlier, all or part of the Bond can be cashed in without notice. No interest is earned if a Bond is cashed in within a year of purchase.

Current interest Rate 4.70% AER Tax-free

[dealseeker]

What about the childdren's alowance. If this is not used except to be put into an account in the child's name is it seen as money from the parent and therefore subject to the £100 rule for interest

Child benefit is for the parent for care of child.
Parent may instruct them to pay directly into their childs savings account (as I have done). My view is that as recipient I am is simply diverting their funds to the child and so in my view any interest earned on this would be treated as counting towards the £100 limit. I'm sure that is strictly how the Inland Revenue would see it.

This rule must be difficult for the Revenue to police and would be interested to hear if anyone has been caught out. Their review of child accounts would need to prioritise checks and I suspect would only pick up those with interest significantly more than £100.

So long as you don't go mad with this then I doubt there would be repercussions..... no guarantees though !

[dunstonh]

Also, when making contributions that benefit a child,make sure you make a record of it as a gift if its in your name re: the child. !

In the event of your death, the savings account will be considered outside of your estate for Inheritance tax purposes potentially saving 40% tax if there is a record of it being gifted. However, with no documentation to back that up, it would be clawed back into the estate.

This is important for those that use the annual allowance for gifting but retain control of the investment.

I'm a bit baffled here!

Is there any reason why you can't open a high interest adult account for a child and submit a R85 inland revenue form? If you could it would mean earning a higher interest rate than would be acheived by a childrens account.

Thanks E.

I have recently opened a few adult accounts for myself. In all cases the rules stated I had to be over 18, so 'no' you can't open an adult account in a child's name.