A tax guide to your child's saving account
QUESTION: My 15-year-old child has a savings account into which gifts from parents, grand-parents and other relatives have been deposited. How is any interest earned on the bank deposits taxed?
ANSWER: Children are liable for tax on savings, but they also have the same income tax allowance as adults. This means that they can earn a certain amount of income each year before paying tax, with anything above that liable for tax.
During the current tax year, 2016/17, adults and children will only pay tax if their income exceeds £11,000. Of course, many children don't have earnings as such, and it's unlikely they will ever exceed this allowance from other income sources, such as savings and investments.
Previously, parents had to complete form R85 when they opened an account in a child's name, to make sure they didn't pay tax unnecessarily. Since the personal savings allowance was introduced for basic and higher-rate taxpayers in April 2016, this form has become obsolete, as all savings income from bank and building society accounts is now paid without tax deducted.
However, if you think your child paid too much tax under the old system, you can reclaim it for them by completing form R40 and sending it to HM Revenue and Customs (HMRC). It takes around six weeks to get a refund.
If you - a parent - give your children money and it makes more than £100 a year before tax in interest (or £200 if both parents give money), all of this income (not just the income over £100) will be taxed as if it were your own.
If income from your gift is likely to breach the £100 limit, then you should put your gifts in a tax-free investment. This can be a cash child trust fund (CTF) if you opened one before December 2010, or a tax-free Junior Isa. The 2016/17 annual limit is £4,080. The £100 limit applies to income from gifts from parents, step-parents, or guardians only – not other family members, such as grandparents, or friends.
In practice, interest arising from the various gifts is apportioned based on who made the gift; so if it came from an uncle it all can be reclaimed, all from a parent whose income arising is less that £100 is also reclaimable but none can be reclaimed on the proportion from a parent that has generated more than £100. Quite complex for small sums indeed.
There is one other small sting in the tail. The Personal Savings Allowance (PSA) introduced in April 2016 allows individuals to receive tax-free savings income of up to a maximum of £1000 for basic rate taxpayers and £500 for higher-rate (there is no PSA for additional rate taxpayers).
The amount of PSA is affected by the £100 rule for children's savings and investments which reflects the fact that, as stated above, the income over £100 from the parent's gift is taxable on the parent.
Finally, interest from individual savings accounts (ISA) are already tax-free and interest earned in these does not count towards the PSA.
:: Feargal McCormack (firstname.lastname@example.org) is managing partner 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 liability for any direct or indirect loss arising reliance placed on replies.