Income Tax For Kids

Basic Income

In the UK, children are taxed exactly the same way as adults.

Each year they have a tax free allowance (2014/15 – £10,000) for income from salary, savings and investments. Most children will not breach this allowance, so will not be liable for income tax.

Interest from savings has the basic rate of tax (currently 20%) deducted by the bank. If children are not going to exceed the tax free allowance, you can fill in Form R85 from the Inland Revenue in order to avoid having the tax deducted by the bank.

If the interest is already deducted then you can fill out Form R40  in order to reclaim the tax.

 

Gifts of money from Parents

In the UK. there is no limit to the amount of money that a parent can give their children. However there are 2 possible Tax implications that you should be aware of.

 

1. Income on monetary gifts from Parents

Inland Revenue have a trick to stop parents putting money in their children’s name to earn interest in order to reduce their tax bill.

HMRC will allow children to earn up to £100 of tax free income (e.g. interest income, dividends), the remainder being taxed at the parents marginal tax rate. This over rules the personal threshold that the child has.

If your child does or intends to earn a significant amount of interest, one way around this is to open an Junior ISA savings account.However please be aware of the limitations and accessibility of the Junior ISAs before committing.

 

2. Inheritance Tax (IHT) Implications

There is a limit of £3,000 per year that can be “given away” without Inheritance Tax implications. 

Gifts totalling over £3,000 per year  (the total amount of gifts not total per person) are potentially subject to inheritance tax in the event of death of the giver. The estate must be worth more that Inheritance tax threshold (currently £325,000) in order for this to apply. If the total value of the estate is less than £325,000 there will be no inheritance tax implications.

To assess Inheritance Tax, HMRC will look at any gift up to 7 years before the death of the giver. Gifts in excess of the £3,000 limit within the 7 years will be taxed as part of the deceased estate. Any gift given more than 7 years previously is exempt and gifts between 3&7 years will be at a reduced (tapered) rate.

 

Exemption

Please note that there is an exemption of the gift rule for regular payments that can be applied to children. If money is given regularly rather than as a lump sum then it may be exempt. 

The money needs to come from income, rather than savings, and mustn’t affect the lifestyle of the giver in a material way (i.e. you can’t borrow money in order to make the payments).

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