Argh. need help with calculations re tax childs RS

LMac

Im really really confused Im sure this has been asked before but Ive read so many things re different isas/adults and child savings accounts, my head hurts

Right, DD has a Halifax RS (10% one) and Ive been putting £30pm in it. I want to up this to £100 from Feb-April (when the year is up) I then want to take the money and put it in my savings account and drip feed it, and a bit more, back in at £100pm (gaining about £65per year interest...i think). Then may 2009, withdrawing it and putting interest elsewhere and ploughing the £100pm back in again...

The bit where I get confused is Ive read in the article, "children can earn £100 interest per year before you're taxed on it" and "In practical terms this means you could put up to £1,850 in the 5.7% top paying children's account, and it wouldn't be taxed, as that would generate around £105. Just to clarify, this doesn't mean £1,850 every year; it's the interest generated from all cash given in this and previous years."

Im sorry for being thick but Im obviously missing something as these two sentances seem to contradict eachother.

Can I keep the RS going at £100pm, withdrawing it all and drip feeding it back in again the next year? (Or putting it in my ISA and using wages to pay the £100 in, but thats a whole other issue!)

(Please be nice )

MrMicawber_2

My understanding is that if you have given your child the money and in any one tax year the interest exceeds £100 then tax needs to be paid on the interest at your tax rate, and that tax is payable on the whole of the interest, not just the bit that exceeds £100. However both parents have an allowance so if you split the gifts between you then more interest can be earned. You should ideally document the gifts so it is clear who they are from in case the Inland Revenue ask. In your example assuming you gave the money to your daughter you would pay tax on £105.

You probably know that gifts from people other than parents or step parents are not subject to this limit - but could potentially be subject to inheritance tax.

LMac

Her dad will be (as of next month or when he gets it sorted) paying maintenence into a RS for her so that parts sorted.

If Im paying £1200 in a year, at 10% will she not accrue "only" £65 interest per year?? And therefore, will she not always stay below the threshold of £100 interest?

Milarky

This attitude of the tax authorities towards parental giving is megalomania IMO. £100 as against the £5300 annual allowance all children are born with is supposed to prevent parents giving 'all' their money to their children - or putting it in their name. A more sensible (and easier to follow) rule would limit the amount a parent may give to their child each year (so if they 'take it' back they lose the right to replace it) like ISAs function. For some reason (probably this schizophrenia of the tax man) children under 16 can't have cash ISAs - an obvious way to save for a child - and must be either born after 1 September 2002 to qualify for CTFs OR must just grow up saving their pennies some other way. The continuing exclusion of young children (born 1992-2002) from ISAs and CTFs makes for an unfairness which probably never occurred to government in their pipe dreams to create a savings culture [just rhetoric]

So I'd like to see the £100 rule scrapped - replaced by i) eligibility to hold cash ISAs from birth and ii) a limit of £3000 (rising to £3600 in April) which parents or relations (or anyone) can give to a child per annum provided it is given within an ISA

iii) would be: scrap CTFs - which are therefore pointless and a duplication of other (more effective) forms of saving. The £250/£500 bribe can be stopped and the civil servants involved in its distribution given proper jobs

LMac

so you dont really have an opinion on the matter of savings then Milarky I must admit, Im rather clueless re money. My principles are those my parents taught me (save for it, then buy it) - everything else Ive learnt from MSE! My dd has a CTF but once the money was deposited, I have thought no more about it, since Im not in the position to lock away money for that length of time. Completely agree with scapping ISAs though. I wish Id had enough financial sense in my teens to start saving in them as soon as I started earning.

MrMicawber_2

Yes, if you put in £100 per month on the 1st of the month you should get just over £65 interest per year, so at the end of year 1 you have £1265.

If you now take all this money back from your daughter to put in an account of yours to then start drip feeding back in to your daughter's account again, I am not sure what the tax position is on you.

If you are now liable to pay tax on the money then there is little point in doing what you plan to do but anyone can give a £3,000 tax free gift except that I am not sure if this would apply from children back to parents. If it does you should be OK but perhaps someone else can help?

If nobody else can help I'd suggest you ring up the Inland Revenue to check what you want to do is OK.

LMac

Good point - I hadnt thought about it that way..doh! Will contact IR on Monday.

LittleVoice

MrMicawber wrote: »

If you are now liable to pay tax on the money then there is little point in doing what you plan to do .

10% is a good rate for a RS, even if you do have to pay tax on it.

LMac

Thanks to everyone has replied. Getting to the point I wish someone would work it out for me, but at same time I really want to understand it!

As Mr Micawber pointed out, if I move money back to my account, I could get in trouble (no info on IR site - need to call)

If I keep it in the Save4It (where it will default to after 1 year) Ill need to pay tax on it next year...

Other thing that occurred to me was that her father doesnt use his ISA allowance. Maybe he could use it to put most of the maintenence money in, and then gift it to me when I need it (All savings DDs and mine, going towards mortgage deposit anyway) But then there will be tax implications in that too....argh. Will come back on tomorrow night for further research after work. Thanks again (and if anyone has any further advice/comments, Id love to hear them)

debbie42

You just need to ensure that any interest on your children's accounts doesn't amount to more than £100 from each parent.

If you moved some money from a child's account then it could quite easily be to pay for something for them, e.g. clothes, holiday etc. I can't see that the IR could complain about that?

MrMicawber_2

Debbie - I don't think the IR should have a problem either, and I'm sure there are ways round it as well and your idea above I'm sure would be fine. I would also think it's OK for daughter to gift back to parent, I'm just not certain. LMac - WHEN YOU GET THE ANSWER TO THIS COULD YOU PLEASE LET US KNOW?