Children's Savings - Tax on the Interest

Complex

Hi,

I was recently looking at setting up a savings account for my child, undecided whether this would be in the form of a stocks and shares JISA or a standard child's savings account but may potentially look to eventually do both. In reading up on children's savings accounts there was reference to the £100/per parent interest allowance where a parent is saving for the child. Notwithstanding the fact this is utterly bonkers I was hoping I could get some clarity. 

1. £100 interest/ per parent. Therefore if both parents equally contributed a lump sum amount of £2,500 into a savings account then at 5%, the interest would be £250, therefore would each parent have the £25 added to their own interest tax position to determine if tax is payable?  
2. How do they know or how do you demonstrate money is not from a parent but is from a friend, grand parent etc. What prevents a parent putting £200 in to an account and suggesting it was from a friend, relative even if it wasn't? 
3. If my partner is not a high earner i.e. £1,000 interest per year allowance instead of £500 then what stops me gifting my wife (which as I understand has no restrictions) the money that she then chooses to pay into the child's saving account? Meaning that in the event the interest surpasses £100 but as a parent I have not contributed, the likelihood of my wife having to pay tax given the £1,000 allowance is low. Or is any savings interest of the child above the £200 joint per parent allowance equally shared amongst the parents from a tax perspective? 

Thanks for the help, who knew it would be so hard to try and save money for your children!? 

Dazed_and_C0nfused

1.  Yes

2.  Nothing 🤥

3.  You can gift your wife what you want, there is no gift tax in the UK, but it is then her money.  She could put it on the 3:30 at Kempton if she wanted.

Albermarle

Notwithstanding the fact this is utterly bonkers I was hoping I could get some clarity. 

It is to try and stop parents using their child's saving account, to avoid paying tax on interest on their own savings.

Complex

Albermarle said:

Notwithstanding the fact this is utterly bonkers I was hoping I could get some clarity. 

It is to try and stop parents using their child's saving account, to avoid paying tax on interest on their own savings.

I understand its purpose, but why not instead ensure children's savings accounts are locked down/ restricted until a child is 18 at which point they have access? It isn't really benefitting a parent if they're having to lump in loads of money that they don't get back into a children's savings account to avoid paying 40% tax.

wmb194

Complex said:

Albermarle said:

Notwithstanding the fact this is utterly bonkers I was hoping I could get some clarity. 

It is to try and stop parents using their child's saving account, to avoid paying tax on interest on their own savings.

I understand its purpose, but why not instead ensure children's savings accounts are locked down/ restricted until a child is 18 at which point they have access? It isn't really benefitting a parent if they're having to lump in loads of money that they don't get back into a children's savings account to avoid paying 40% tax.

Because you might have use for the money before they're 16/18, it's not just parents who can be bare trustees for a children's savings account and children can also operate children's savings accounts. It would be a bit unfair not to allow them to access their own savings...

refluxer

Complex said:

I understand its purpose, but why not instead ensure children's savings accounts are locked down/ restricted until a child is 18 at which point they have access?

In essence, childrens' savings accounts are restricted - in that the money has to be used 'in the best interests of the child' but this tends to be done on trust and there's usually nothing to stop unscrupulous adults using their kids' accounts for their own cash, hence (presumably) the reason for the £100 rule. This was particularly relevant in the past, when interest rates for kids accounts were often much higher than adult savings accounts, however there is much less of a difference these days. In fact, I'm finding that adults can often get better rates.

My kids get money from different sources and this often includes relatives paying me (sometimes in cash) and me passing the money onto the children so if this was ever questioned by HMRC, proving that the money hadn't come from me would be a nightmare. With this in mind and with interest rates relatively high, plus the fact that the best Junior Cash ISAs are paying around the same as the best children's savings accounts (3-4%), I've decided to start making better use of the £9k Junior ISA allowance by funneling more of their savings into their Junior ISAs to avoid any potential tax complications for me.   

cwep2

One thing worth mentioning. I set up kids savings accounts a few years ago, interest rates were low but for small amounts kids savings still had good rates. Interest was well below the £100, didn't think it would be an issue.

Grandparents have contributed a couple of £1000 lump sums (directly to kids accounts) in the mean time, and now rates have also gone up and now the interest is over £100/yr. Now it's kind of a mess, given contributions to their accounts have come from both myself (as a parent) and grandparents and there seems to be no real clarity from HMRC as to to the treatment of this given the different sources and therefore whether the interest needs to be declared by me or not. I know that my previous contributions to the account are accruing less than £100/yr interest, even if the total is above that level so I took the decision not to include it on tax return or pay tax on it, but equally I would have kept it segregated to avoid it even being a question if I was doing it now.

Equally I am now thinking of just lumping it all into a JISA to avoid even the possibility that I'm not paying all the tax I owe.

Albermarle

Complex said:

Albermarle said:

Notwithstanding the fact this is utterly bonkers I was hoping I could get some clarity. 

It is to try and stop parents using their child's saving account, to avoid paying tax on interest on their own savings.

I understand its purpose, but why not instead ensure children's savings accounts are locked down/ restricted until a child is 18 at which point they have access? It isn't really benefitting a parent if they're having to lump in loads of money that they don't get back into a children's savings account to avoid paying 40% tax.

Just put it in  JISA instead. You can add £9K pa and the child can not access until 18.

Top junior ISAs: 4% children's ISA tax free - MSE (moneysavingexpert.com)

xylophone

https://webarchive.nationalarchives.gov.uk/ukgwa/+/http://www.hmrc.gov.uk/families/babsi.htm

Hails from the days when interest on savings was paid net but the information on £100 rule remains the same.

Always best to keep gifts from parents separate from those from other people (except in JISA where it doesn't matter).

And yes, to be strictly within the rules, if an account holds gifts from parents and gifts from others, the interest should indeed be apportioned so as to test against the £100 rule.

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4310