£100 rule - could it work in a child's favour?

Reaper

Just an idle thought. Under the £100 rule if a parent invests for a child, even in a Bare Trust, the money is taxed as if it is the parents if the income exceeds £100pa.

But what is the parent is a low/nil rate tax payer (e.g. retired) and the child is a higher rate tax payer (e.g. a 16 year old with an Ebay business). Would that mean the child would pay LESS tax if the £100 threshold was breached?!

jimjames

Interesting idea but yes that would appear to be a way of reducing tax. I guess the situations where it applies would be very small.

Malthusian

For there to be any point, the precocious businesschild would have to give money to his parents for them to invest - otherwise they might as well just invest their money the normal way.

Although theoretically any higher rate taxpayer could give money to retired parents - or anyone you know in a lower tax band - to invest on your behalf, it would be pretty unusual because a) you have no control and no way of preventing them just spending it and b) if they die, even assuming they remembered to specify in their Will that you were to get your gift back, it might be subject to Inheritance Tax.

(Perhaps there is some tax evasion implication I am missing, but it seems to be that there's nothing to stop you giving someone money to invest. But the operative word is "give" - the money would be legally theirs and nothing stops them spending it.)

Investing in a spouse's name is one thing because you live with them and the laws of divorce mean it is still yours in some way, investing in anyone else's name gives you no such protection.

Reaper

Malthusian wrote: »

For there to be any point, the precocious businesschild would have to give money to his parents for them to invest - otherwise they might as well just invest their money the normal way.

The money could have been invested when they were a toddler, but becomes of interest only when both the £100 rule has been breached and the child becomes a tax payer.

Although theoretically any higher rate taxpayer could give money to retired parents - or anyone you know in a lower tax band - to invest on your behalf, it would be pretty unusual because a) you have no control and no way of preventing them just spending it and b) if they die, even assuming they remembered to specify in their Will that you were to get your gift back, it might be subject to Inheritance Tax.

(Perhaps there is some tax evasion implication I am missing, but it seems to be that there's nothing to stop you giving someone money to invest. But the operative word is "give" - the money would be legally theirs and nothing stops them spending it.)

Often if there is any understanding the money is to be returned it is not a valid gift. For example to avoid the £100 rule you "gift" a sum of money to your brother who happens to "gift" an identical amount to your child's trust. That would not be legal if there was any formal or informal agreement that your brother was to pass it on. I don't think it's an issue with a straightforward investment as you describe though.

Drp8713

Reaper wrote: »

Just an idle thought. Under the £100 rule if a parent invests for a child, even in a Bare Trust, the money is taxed as if it is the parents if the income exceeds £100pa.

I may be wrong, but if you invest e.g an Investment Trust, you are not getting interest (unless its a bond based trust paying interest) you are getting dividends.

Most adults will use an ISA to invest so unless the adults are higher rate tax payers, the notional 10% dividend tax covers you for now and you will have a £5000 allowance from next year to use.