Some rules around gifting money to your kids
QUESTION: I want to put some of my savings into the names of my children, who are all under the age of 18. Will they be taxed on the interest that is earned from those savings and what are the rules around gifting money?
ANSWER: Children's income is theirs in their own right, no matter how young they are. They are also entitled to the full personal allowance. But for a child under the age of 18 and unmarried, this does not apply to income that comes directly or indirectly from a parent.
It is important to note that children get a tax-free allowance. For the 2016-17 tax year this is £11,000. This means that children should not have to pay tax on savings.
However, it's worth noting that if minors are given money by a parent, the situation is slightly different, as a rule known as the “£100 rule” applies. With the exception of Junior ISAs, this states that annual interest is only free up to £100 (see other exceptions below). Beyond that, the entire amount is taxed at the parent's rate.
Where it has come from the parent it is treated as the parent's own income with the following exceptions:
:: Each parent can give each child sums of money from the total of which the child receives no more than £100 gross income per annum eg interest on bank or building society deposits. If the income exceeds the limit, the whole amount and not just the excess over £100 will be taxed on the parent.
:: The National Savings ‘children's bonds' for under 16 year olds can be given in addition because the return on such bonds is tax exempt.
:: A parent may pay personal pension contributions of up to £3,600 a year on behalf of a child under the age of 18.
:: Parents may contribute towards a Child Trust Fund Account for their children.
For tax purposes income that arises to the child that has come from the parent is treated as a settlement and is taxable on the parent.
Also, you don't want your children to face an unexpected inheritance tax bill because of money you've handed over during your lifetime. However, each of us has an annual inheritance tax gift allowance. This enables you to give some money away each year to your children without needing to worry about this tax. The annual allowance for 2016/17 is £3,000 per person.
If you haven't used last year's annual allowance, you can carry this forward. So you could give £6,000 in a year to your child and avoid IHT problems – or up to £12,000 if both parents want to give money and haven't already used their allowances.
If you wish to give your child a more sizeable sum over the annual allowance, tax implications can become complicated. If you die within seven years of making that gift, there could potentially be up to a 40 per cent inheritance tax liability payable by your child.
However, as long as you live seven years after making the gift – known as a ‘potentially exempt transfer' – then there is no tax to pay.
:: Malachy McLernon (email@example.com) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.