Kids Savings - Interest

kattymac79

My two kids each have a savings account with Barclays which I pay the Child Benefit in to each month. They've had them for nearly 3 years but Barclays is paying rubbish interest and so we were hoping they'd be able to open a few new accounts with the Halifax, Saffron BC, HSBC and Nationwide to take full advantage of the good interest rates they have, but the interest they earn might push them over the £100 tax free interest limit.

So my question is, if they pay money by direct debit to new accounts from existing accounts, is it still classed as being "given by parents" and so liable for the tax on interest over £100, or is it exempt from the tax because they are simply moving existing savings to new accounts?

It won't be huge amounts of tax to pay, I just want to know when does their savings stop being "money given by the parents" and start becoming "their money" to invest/save.

Extra Note my kids are 3 and 8. My eldest could make an informed decision on where to save her money, but obviously I would decide to open the Halifax account etc for my youngest. Maybe it comes down to their ability to understand/manage their money as to when it becomes "theirs"?

justme111

I see. Just looked at HMRC website and it is not clear to me - do they mean £100/year allowance applies to money given by parents in that particular year or does it apply to the to total of children's interest income if originally money came from parents in previous years. Will be interesting to see the replies.

xylophone

The important consideration is the origin of the funds and whether it counts as a "parental settlement".


http://www.charterbridgefinancialplanning.co.uk/factsheets/investing-for-children-what-you-need-to-know/

Taxation of children
Subject to the special rule applicable when a parent provides sums for the benefit of their children (see below), for tax purposes a child is treated in the same way as an adult and so is subject to income tax and capital gains tax on his/her income and gains. It follows that the child is entitled to a personal allowance and the annual capital gains tax exemption. This means that there are tax planning opportunities when investing for children to take advantage of the child’s personal allowance and annual CGT exemption. Generally speaking, where the provision of the funds in question came from the child’s parents the income arising during their minority will be assessed on the parents (see below).
Parental settlements and income
There is an important exception to the rule that a child’s income is taxed on the child. This applies where income is produced as a result of a “settlement” (which covers all gifts) made by a parent for his unmarried minor child who is not in a civil partnership. In this case, all such income is assessed on the parent unless the total gross income which comes from capital provided by the parent for the child does not exceed £100 gross in a tax year.

eskbanker

kattymac79 wrote: »

I just want to know when does their savings stop being "money given by the parents" and start becoming "their money" to invest/save.

My understanding is that money given by parents is always money given by parents and wouldn't ever become exempt by virtue of being transferred between accounts, which would be a pretty easy loophole!

Having said that, there do seem to be some easy loopholes mentioned at https://www.gov.uk/savings-for-children, namely that "The £100 limit doesn’t apply to money given by grandparents, relatives or friends" and also that putting the money into a junior ISA shields it from tax.

Worth reading http://www.moneysavingexpert.com/savings/child-savings-tax-free#taxing for further info, including the useful fact that the £100 limit is per parent, so if two parents each make contributions to their kids' savings then this effectively doubles the allowance.

justme111 wrote: »

Just looked at HMRC website and it is not clear to me - do they mean £100/year allowance applies to money given by parents in that particular year or does it apply to the to total of children's interest income if originally money came from parents in previous years.

My understanding is that it's the latter.