Don’t let your generosity cost you dear

Author: Anna Bowes
15th November 2018

According to an article in The Times last weekend, four out of five parents would choose not to tell their children that they have saved into a Junior ISA for them until they reach the age of 16. Some will delay it even longer, until they are 18 and are about to have unfettered access to the money, when it is automatically transferred into an adult ISA in their own name.

Children's savings

Apparently, some delay the news as they want to keep the money as a surprise, but others don’t think that their children are responsible enough!

However, as we mentioned in our article The cost of delay, the sooner you start saving the better, so it’s a great idea to get your children into the savings habit and to recognise the importance of putting money aside for their future.

Many parents are generously saving for their kids in order to give them a helping hand which may keep them debt free in University or supply them with a good deposit for their first home.

Children have their own personal allowance, so for the majority there will be no tax to pay on their savings interest. However, parents should be aware that there may be a tax liability to themselves on the interest earned on any money they gift to their children, until they reach the age of 18.

This even applies to interest on cash gifted by a parent deposited in an adult ISA in the child’s name. Adult cash ISAs can be opened from the age of 16, although not all providers will accept under 18s unfortunately. So, make sure you check before trying to apply to avoid disappointment.

If the total gross interest earned on all cash gifted by each parent is more than £100 per year, then all of it (not just the excess) will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate - if it takes them above their Personal Allowance and/or Personal Savings Allowance.

If the gross interest earned is less than £100 for each parent’s gift, it is considered so minimal that parents do not need to declare it.

Gifts from any other family members or friends will not be viewed in the same way. Instead, any interest earned will be treated as belonging to the child themselves and therefore can be earned tax free if they are non-taxpayers.

The exception to this rule is on funds deposited into a Junior ISA, Child Trust Fund or NS&I Premium Bonds. Any interest earned on the former two products have a specific exemption and so are simply tax free regardless of where the funds came from.

And prizes from Premium Bonds are not classed as interest, so are also exempt. It’s just as well, as it would be pretty shocking for a parent to have to pay income tax on a £1m prize!

Premium Bonds have apparently fallen out of favour as a savings vehicle for children – so from next March, the minimum deposit will fall from £100 to £25 and opening Premium Bonds for a child will no longer be restricted to just parents, guardians and grandparents. Instead any adult will be able to give Premium Bonds to a child, although they will need to nominate a parent or guardian to look after them.

So, bearing the above in mind, if there are friends and family members who would like to save for your children, you could consider asking them to contribute to a standard child’s account (or cash ISA if they are 16 or 17) - whilst as a parent, you can deposit cash into the most tax-efficient vehicles for both your child and yourself, regardless of who contributed and how much interest is earned.

If you need any help choosing the right account for your child or grandchildren, do not hesitate to get in touch. Call us free on 0800 011 9705 to speak to one of our savings experts.

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