Children and Tax

Transferring income to children

Children have their own personal allowances and tax bands. Where their only income is, at best, a few pounds from a paper round or a Saturday job, there may be some scope for transferring income producing assets to the children to use up their personal allowance.

However such assets should not be provided by a parent, otherwise the income remains taxable on the parent, apart from the first £100 each tax year.

Tax Planning

There is nothing to stop you employing your children in the family business so as to take advantage of their personal allowance. They must be old enough (generally at least 14 years old), They should not work more hours than is legal, and should actually carry out work for the business with payment at a reasonable commercial rate.

Children and capital gains

Children also have their own annual exemption for capital gains tax so that assets transferred to them which have a bias towards capital growth rather than income may prove to be more advantageous.

Repayment claims

Where children have significant sources of income from which tax has been deducted, such as bank interest or trust income, they will almost certainly be entitled to a repayment. In such cases a repayment claim should be made.

Tax Planning

There are still quite a few ways income can be transferred to children tax efficiently:  

• buy them premium bonds - winnings are tax free
• buy National Savings Children’s Bonus Bonds or National Savings Certificates - these are tax free
• Friendly Societies offer 10 year, tax exempt savings plans for children for up to £25 per month.
  

Child Trust Fund

For children born on or after 1 September 2002 a Child Trust Fund is available. The idea is to encourage tax efficient savings, with the government’s help, to build a savings fund which the child can access once they reach 18. The government’s initial contribution is £250 or £500 for low income families, with a further payment of £250 (and again £500 for lower income families) once the child reaches the age of seven.

Other contributions of up to £1,200 per annum can be added to the fund by family or friends and, although there is no tax relief on making the contributions, the fund is tax exempt. This is therefore a tax efficient medium to which regular transfers can be made.

Child Tax Credit

The Child Tax Credit is means tested and potentially available to families who have responsibility for one or more children. It is a tax free payment made direct to the main carer and it will be available where combined annual income is less than £58,175 or £66,350 if there is a child under one year old.

There are several elements to the credit and claims can be complicated. Please talk to us.

Practical Tip

Many couples who are entitled to a tax credit do not receive it because they fail to apply.