Child's 'draw down' income - affect on tax credits?

Daisyone

I'm think I know the answer to this but just want to check with some of the wise heads here!

Former situation:
Child
Child's parents were not married (or living together)
Mother claiming tax credits and receiving child support from father

New situation:
Father dies suddenly
Paternal grandparents contribute the same amount of money monthly to support child (causing them hardship). This has only been for 2-3 months since the death.

Life insurance pays up
Child is gifted a significant amount of this from the recipient of the insurance (ie child is not inheriting nor is she a beneficiary of the insurance)
Money is to be invested in a trust for her BUT mother and grandparents would like to use interest + a drawdown arrangement to replace the child support.
On the face of it, this would need to be paid into the mother's account for use (child still v young).

The question is, will this 'income' affect mother's tax credit claim? What steps would they need to take to ensure that it is absolutely clear that this is money for the child?

Thanks in advance for any thoughts.

xylophone

The grandparents are making the gift to the child?

This will be a bare trust?

The idea is for the cash to be invested in income producing assets?

Or in a deposit account of some kind?

It would be better if the grandparents were to be Trustees.

Example

https://www.bathbuildingsociety.co.uk/savings/business-and-professional-accounts/trust-accounts/trust-fixed-term-deposits

https://www.hl.co.uk/news/articles/archive/why-bare-trusts-offer-a-simple-and-effective-way-to-invest-for-a-grandchild

https://www.gov.uk/trusts-taxes/types-of-trust

They could then provide the mother with a letter confirming that the capital is held in trust for the child absolutely and that the income is provided as maintenance for the child?

Daisyone

Thanks for this but just to clarify - it's not the grandparents who have gifted the money but their deceased son's partner (the life insurance was a condition of their joint mortgage). The partner was under no obligation to give any of the money away and is not related to the child. I think she is great to have done this.


It is a reasonably large sum but insufficient to provide an income from the interest alone so they would need to withdraw some capital. They will of course be seeking financial advice re investing but need to establish whether there is any threat to tax credits.

calcotti

Even if the money were treated as the parents it is capital and there is no capital limit for Tax Credits. Drawing down capital would not affect tax credits. The only thing that would affect Tax Credits would be the interest or investment returns if more than £300/year. Whether or not these can be shielded by virtue of being in a trust in the way you describe I do not know. I suspect that because the investment has been funded by someone else the returns can be ignored whereas had the funds come from the parent they would not be - but I’m not sure.

https://www.gov.uk/guidance/tax-credits-working-out-income

xylophone

It would be possible for the partner to be a Trustee for the child, perhaps with one of the grandparents?

With regard to the partner, this would be a substantial gift in terms of her own estate (in hope of a Potentially Exempt Transfer) - she should keep a note with her own financial records.