Understanding tax on savings from grandparents

NurseMoneySaver1122

So my parents-in-law would like to open an account to save for our daughter. I'm concerned of the tax implications on us, as we are currently saving for a mortgage deposit and are already likely to have to pay tax on our savings interest for the first time this year (we have already maxed out ISA).

I understand interest accrued on children’s savings is not subject to tax if the money has been given by a grandparent. However, I remember reading "don't try to gift your friends child £20,000 and they gift your child £20,000, because HMRC will be onto you", which I understand this scenario may be unlikely to be a genuine one. Although at the same time, if that was a genuine situation, those friends would not be breaking any laws/rules, so its equally a little confusing!

So then how can they trust that the money the grandparents pay in is really the grandparents? Surely that's left open for a parent to "hide" their contribution under the guise of being the grandparents? 

It's an obvious loophole (surely) and one I'd rather not be "assumed" to be involved in!

Of course it's lovely that they want to save for her, but due to our likelihood of paying tax on savings interest this year, I want to avoid any chance of having to pay more!

I feel like I'm missing something???

eskbanker

Have you considered opening a junior ISA for your daughter, and letting them pay into that, thereby eliminating all tax issues?

masonic

It's not something you need to worry about, as you are not intending to try and evade tax by saving your money in your child's name via the grandparents. If HMRC took an interest in the savings, I'm sure the grandparents would be able to demonstrate that the source of funds didn't involve you, and that would be the end of the matter.

Albermarle

Top junior ISAs: 4.15% children's ISA tax free - MSE (moneysavingexpert.com)

c129876

We are still weighing up how we feel about an ISA and the fact it automatically becomes hers at 18.

So if we opened a Ronnie the Rhino account, for example, and we deposited £1000 once only....
Then the parents in law deposited a regular monthly amount....
Does that mean we wouldn't pay tax because they can see we have only deposited £1000, which isn't earning over £100 in interest a year, and the grandparents deposited the additional amounts?
But then any compounded interest would eventually push us over too.

eskbanker

c129876 said:

We are still weighing up how we feel about an ISA and the fact it automatically becomes hers at 18.

So if we opened a Ronnie the Rhino account, for example...

A non-JISA taxable account such as that would also automatically become hers at 18 - if you or your in-laws want to retain control over money beyond the child's 18th birthday then the money can't be saved in her name and would need to be saved within an adult account.

c129876 said:

...and we deposited £1000 once only....
Then the parents in law deposited a regular monthly amount....
Does that mean we wouldn't pay tax because they can see we have only deposited £1000, which isn't earning over £100 in interest a year, and the grandparents deposited the additional amounts?
But then any compounded interest would eventually push us over too.

Money in your daughter's name is only taxed as if it was your money if the interest on parental contributions exceeds £100 per parent.  Interest arising from grandparents' contributions would only be taxable under your daughter's name in the unlikely event that it exceeded her personal tax allowances....

https://www.moneysavingexpert.com/savings/child-savings-tax-free/#accordion-content-833797772-6

masonic

c129876 said:

We are still weighing up how we feel about an ISA and the fact it automatically becomes hers at 18.

So if we opened a Ronnie the Rhino account, for example, and we deposited £1000 once only....
Then the parents in law deposited a regular monthly amount....
Does that mean we wouldn't pay tax because they can see we have only deposited £1000, which isn't earning over £100 in interest a year, and the grandparents deposited the additional amounts?
But then any compounded interest would eventually push us over too.

The account you mention is actually more accessible to the child than a JISA. You would be in complete control until they reach the age of 12. Thereafter, they can make limited withdrawals without your authorisation, then at 18 they get full control. This graduated approach to handing over responsibility is a good way to ensure she has a grounding in financial responsibility by the time the money becomes fully accessible. I personally think the £250 per week withdrawal limit is quite high for a 12-18 year old.

Would suggest having separate accounts for parental vs grandparent contributions, as it will make it easier to differentiate from whom the interest has accrued.

Albermarle

We are still weighing up how we feel about an ISA and the fact it automatically becomes hers at 18

As said above any savings account in her name will be fully hers by age 18.

You really only have 3 options

1) You keep the money in your name ( or another adult) and give it to her when you think appropriate.

2) Let her have full responsibility at 18. She might well spend it all quickly but there is a life lesson there.

3) Do some of both . In this case a children's  saving account rather than a JISA may be better, as she will get some limited access before 18 and get used to the idea of adding ( birthday money for example) and withdrawing from it.

In the meantime you can do your best to teach her about money, but no guarantee of success. In any case if an 18 year old blows her savings on parties, clothes, holidays etc. it is not the end of the world. You are only young once.