Childrens savings and tax question

[hurricane]

I think I'm right that you are allowed to save up to £5000 in an account for a child without it being taxable? What happens if you reach the £5000 limit in a children's bank account to the interest? And does the interest then make the account liable to tax? And will the bank take the tax off automatically? And what if you also had another savings schemes for the same child like a long term investment thing where you put £25 a month in till the child is 18. Do you have to declare this? And who to? Very confused.

[Iota]

from HMRC website:

Non taxpayers

Please note that if you are a UK Resident individual you cannot arrange to have interest paid gross for AIFs, this includes the interest paid to children. However, where appropriate parents or guardians can claim tax back on the child?s behalf.

Children, like adults, can have a certain amount of income before they start paying tax. They are entitled to the same personal allowance as other people. So, for example, for the tax year 2003-2004, they can claim back the tax on their savings income if their total taxable income is less than £4,615.

Children under 16 in Scotland or under 18 in England, Wales and Northern Ireland cannot apply personally to get their tax back; a parent, guardian or trustee must do it for them.

Be careful

There are special rules if the savings (including units in unit trusts and shares in open-ended investment companies) have been given by a parent. If gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is normally taxed as that parent?s income. A child cannot get back any tax on that income. Nor can interest paying accounts be registered to have interest paid without tax taken off.

[hurricane]

Thanks Iota, so will the bank automatically take the tax of my dcs' account once it gets past £4,615 or do I have to declare this money on MY tax return. Still confused.

[BigGitDad]

Excellent post Iota!

[ChasingSquirrels]

it depends who gave the dc's the money that is generating the income.
If it was you - then you should declare it on your tax return if the annual interest is greater than £100.
If it wasn't you - then you should have filled in a non-tax payer form for the bank, and they won't deduct tax. Not sure if the income is more than £5,200 (or whatever the annual allowance is now), but at that point they should be tax payers and not entitled to have the interest paid without deduction of tax.

[hurricane]

Right, so I only need to worry if the interest (from all of each child's savings in different schemes?) is greater than £100 EACH YEAR? Otherwise there's no problem?

[ChasingSquirrels]

yes, remember the tax year runs 6 April to following 5 April.

[hurricane]

OK, thanks.

[Legacy]

You should have filled in an R85 form when you opened the kids' bank accounts - to instruct the bank/ building society not to deduct basic rate tax.

What I want to know though is how on earth do they (HMRC) monitor what money comes from where?

We pay all child benefit into the kids' accounts, but that would amount to c £800 each, so that won't generate £100!

However whenever we get cheques from relatives etc they also go in there, and I keep a list with the account books of what all the cheques were (e.g. granny at Easter etc). But no one has ever asked about it!

My kids make me feel rather poor - DS1 now has nearly £10K (but doesn't know it )

[janinlondon]

Legacy I have heard of the tax office asking parents to provide proof of where the money came from. The onus is on the parent to show its not a tax shelter. We keep records of all the gifts and always ask that money given to our DD is in cheque form so it can be traced.

[Legacy]

Jan - that's interesting. Well, looks like my list is a good idea then, better keep it up!