Ask The Taxwise ExpertQ. One of the questions I quite often get asked is “how can you gain a financial advantage from your children”?
A. So Making the most of your children - yes, I thought that might get your attention! At some point it crosses the minds of most parents and grandparents that there could possibly be ways to save tax by utilising your children, at this point I am assuming that if your children are anything like mine, then the thought of diverting their attention away from back to back episodes of Glee and putting them out to work may be met with some resistance, so could they come in handy in other ways?
Each child is entitled to a personal allowance exactly like an adult, and will be taxed using the same starting, basic, higher and additional rates dependant on how much they earn. Therefore if a child is able and willing to earn a bona fide wage, they can utilise the personal allowance, only paying tax on the excess. In order to ‘earn’ a child must be able to demonstrate that they are being paid as an employee and not as a child of the parent providing it. In the case of J Dollar V Lyon, payments made to children were deemed to be in the nature of pocket money and as such disallowed as a business deduction and conversely not deemed to be earned income.
Parent’s giving large sums of money to a child to avoid paying tax on interest in their own hands, only works to an extent as annual income which exceeds £100 per parent, per child, per tax year is deemed to be that of the parent.
Child trust funds are tax free and are applicable for all children born after September 2002 and receive a minimum of £250. These provisions ceased from January 2011, however existing accounts can remain open and parents are able to contribute up to £1200 per year into these accounts.
Giving your money to a child through the form of a trust may be mildly more advantageous. Income which is accumulated ready to pay out to a then adult child in later life could be used for university fees. However income paid out to a minor (to perhaps fund high school) of a parental settlement for income tax purposes will be assessed on the parent instead of the child, and of those sums paid out a liability will arise on the trustees.
As with the personal allowance, children are also afforded the same entitlement to the annual exemption for capital gains tax, and excess gains over and above the exemption is taxed at 18 or 28% as it is for adults.
Investment plans for children (under 18’s), which include Junior ISA’s have been in place since November 2011, and children who are unable to qualify for Child trust funds can invest up to £3,600 annually.
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