Tax on cash gifts to children?

jay_clock

I got divorced a few years back. Due to a complicated cash split, my ex wife got more money upfront, and now has to pay me back a large-ish sum. I plan to "give" a third of it to each of my three daughters to pay off some of the student loans they are about to clock up (eldest is in 2 yr of uni, youngest in first year of A levels)

I am told that gifts are taxable? The only answer I can get on this online seems to relate to inheritance tax, and since I don't plan to die just yet, am not too bothered about this.

So what I would ideally like to do is to put the money into 3 separate accounts in their names, with me as a second signatory, so that the tax on the interest is at the lower rate or at zero (as they earn little or nothing) but that they cannot go and take it all out to spend on clothes.

Any views, or advice? Any pointers on good websites to go to?

Reaper

Can't claim to be a tax expert so you may need to wait for some more replies, but my understanding is no, they are not taxable - just liable to inheritance tax if you die within the next 7 years. See this where somebody asks a similar question.

You have the option of putting the money "in trust" for them (not quite the same as the Child Trust Fund as they are too old for that).

That means it belongs to them and any interest earned is at their tax rates instead of yours - probably nothing if they are not earning. The key difference compared to just giving it to them is they can't spend it until they reach a certain age (typically 18), without the approval of the trustees (such as yourself).

If that sounds like something you want to do then speak to your bank/building society to get the accounts set up. However if you are only concerned with tax then just write them a cheque.

Either way be sure to fill in form R85 so the interest on their accounts is paid without having tax automatically deducted from it.

ebyard

Again I'm not a tax expert but I believe you can give cash gifts to your family upto £3000 per year before it becomes taxable as income.

I have never heard of anyone be prosecuted for giving their kids money though, so it's up to you!

sloughflint

ebyard wrote: »

Again I'm not a tax expert but I believe you can give cash gifts to your family upto £3000 per year before it becomes taxable as income.

Wrong. You are thinking of IHT exemption

ebyard

sloughflint wrote: »

Wrong. You are thinking of IHT exemption

Yes that's the one. Like I said, I'm not an expert, but even so IHT implications should be considered...

sloughflint

ebyard wrote: »

but even so IHT implications should be considered...

You said 'taxable as income'

For info on IHT:
http://www.hmrc.gov.uk/cto/customerguide/page6.htm

CLAPTON

Gifts are tax free.
But potentially liable to IHT if your estate is sufficient and you die within 7 years.

If you put the money in joint account with yourself, the HMRC will deem the ownership to be 50-50 so the interets will be taxed accordingly.

If you don't trust them yet why not simply wait until you do and give them the money with no strings?

In any event, repaying student loans is probably not the best use of the money as the interest rate is quite low 3.8% and the repayment schedule very very generous...
better its keep it to help them put a deposit on a rented flat or deposit to buy a house or whatever once they start working.

ebyard

sloughflint wrote: »

You said 'taxable as income'

For info on IHT:
http://www.hmrc.gov.uk/cto/customerguide/page6.htm

I made a mistake, just like you have at some point in your life. Lose the attitude.

Reaper

CLAPTON wrote: »

If you don't trust them yet why not simply wait until you do and give them the money with no strings?

The only disadvantage with that is that the interest earned in the meantime will be taxed at the parent's tax rate, whereas if they are held in trust it will be at the child's rate - and therefore probably tax free.

EDIT: I didn't mean a joint account. Just purely in the children's names but with the parent as a trustee. As I understand it the tax would be entirely up to the children, not 50-50. Is that right?

Lokolo

Reaper wrote: »

The only disadvantage with that is that the interest earned in the meantime will be taxed at the parent's tax rate, whereas if they are held in trust it will be at the child's rate - and therefore probably tax free.

Erm the youngest is 16/17, doesn't the whole child parent tax thing stop at that point at 16?

Um CLAPTON - however CPI at the moment is sky high - you think it will be low in March? I'm still hoping for mass recession and hopefully CPI drop loads!

Reaper

I'm on well wobbly ground here so do correct me if I'm wrong.

I believe that a trust can run up until age 25 if you want (although age 18 is more common).

For tax purposes the money becomes the child's as soon as the trust is set up, but the trustees have the power to restrict access to it until the child reaches the specified age.

That means the interest can escape tax if the child has no income of their own regardless of what age they are.