Giving money to your children and grandchildren
You might want to give money to your children or grandchildren to encourage them to save or to give them a nest-egg when they leave home. If you give money to your children, or you invest it for them, you may have to pay tax on the interest.
Giving money if you're a parent or step-parent
There's no limit on how much you can give or invest for your children or grandchildren. But the interest might be taxed as your income if:
- you're the child's parent or step-parent
- your child's unmarried, not a civil partner and under 18
Parents have separate limits
Each parent has a separate £100 limit. So if both parents contribute equally your child could get interest of £200 a year without either of you having to pay tax on it.
There's a separate £100 limit for each step-parent too.
Gifts made by grandparents and carers
The £100 limit only applies to parents and step-parents. You can give as much as you like to your grandchildren or other people's children - the interest won't be taxed as your income. However, the children may be eligible to pay Inheritance Tax on the amount they receive and pay tax on interest from the income of their savings.
Tax on children's income
Your children have a personal tax-free allowance each year (£6,475 for the 2010-2011 tax year). They can have income (including interest) of this amount in the year without paying any tax.
A parent can apply to have their child's bank or building society interest paid without tax being taken off if:
- the child's income is less than their tax-free allowance
- the child doesn't get more than £100 interest from money given to them (or invested for them) by a parent
You can apply using HM Revenue & Customs (HMRC) form R85. But first you should complete the helpsheet for form R85. Once you have checked your child is entitled to get their interest without paying tax, give the completed form to the bank or building society.
Inheritance Tax on gifts
If you give money to your children or grandchildren (or to children you care for) Inheritance Tax exemptions may mean that tax does not have to be paid on it. If you die within seven years of giving the money there might be some Inheritance Tax to pay.
Tax-free savings for children
There are various tax-free savings schemes you could use for your children.
Child Trust Fund (for children born after 1 September 2002)
If your child was born on or after 1 September 2002 and is eligible for Child Benefit, lives in the UK and is not subject to immigration control, then you'll get a £250 voucher from the government (£500 if your income is no more than the limit for Child Tax Credit) to set up a Child Trust Fund. Once you have set the fund up anybody can add up to a maximum of £1,200 a year to it. There will be no tax on any interest or gains.
Children's Bonus Bonds (NS&I)
You can invest from £25 to £3,000 for five years. The interest and guaranteed bonus are tax-free for you and your children.
Other savings products
There are other savings products you may want to consider for children. As these are not specifically designed for children in some cases you will have to manage the account until the child reaches a certain age.
Index-linked Savings Certificates (NS&I)
You can invest from £100 to £15,000 for three or five years. The value of your investment is guaranteed to keep up with inflation and the interest rate is guaranteed. You don’t pay any tax at all.
Premium Bonds (NS&I)
You can buy between £100 and £30,000 worth of Premium Bonds. You won’t get any interest, but each bond is entered in a prize draw every month and prizes are tax-free.
Putting money into a family trust
You can use a family trust to look after money and provide an income for children who can't manage their own affairs.
Setting up a trust is complicated. You'll need to get legal advice and tell your Tax Office if you set up a trust.