Understand the rules around giving money to children

Esther Shaw / 07 April 2015

As a parent, you want to give your children the best start. Esther Shaw considers the tax implications and rules around giving money to young people and children under 18 years old.

As a parent you may be keen to give money to your children or grandchildren, so they can start building a nest egg for the future.

By squirreling money away from an early age, this pot could eventually help your loved ones to meet costs, such as buying a car, going to university, or a deposit for their first home.

But before giving gifting any cash you need to plan very carefully, as if you don’t give it away in the correct way, you could find yourself facing a hefty bill from the taxman.

While one of your biggest concerns may be inheritance tax, there are a host of other considerations you need to think about as well.

Read how to reduce the amount of inheritance tax your children will have to pay

Giving financial gifts to children under 18

First off, it’s important to note that children get a tax-free allowance.

For the 2015-16 tax year this is £10,600. This means that children should not have to pay tax on savings.

To ensure your child receives interest without having any tax deducted, the key is to fill out an R85 form.

At the same time, it’s worth noting that if youngsters 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 (see below), this states that annual interest is only free up to £100.

Beyond that, the entire amount is taxed at the parent’s rate.

Annie Shaw: How to stop grandchildren frittering a gift

Make use of Junior ISAs

One of the best ways to give money to children under 18 is by making use of Junior individual savings accounts (ISAs).

These accounts are very similar to adult ISAs, as savers do not incur tax on the interest.

Family and friends can put money into the pot up to a maximum of £4,080 in the current tax year.

The money can be invested in cash, shares or both, and children can then only access the money once they turn 18.

Read about the tax implications of giving money to your adult children

Income tax and children over 18

When thinking about gifting money to older children, you may be worried that they could be liable to pay income tax on the gift itself.

But these fears are unfounded, as HMRC does not count cash gifts as income.

The only way they may face a tax liability is if they save or invest the money and make interest off it.

For more information on income-tax eligible income visit the HMRC website.

How to help a student out financially

Could your children lose out on benefits?

As a parent, you also need to check if giving a financial gift will have any impact on your son or daughter’s ability to claim benefits.

This is because some benefits are dependent on the amount of savings someone has in the bank.

A person is not eligible, for example, to claim for income support if they have more than £16,000 in capital.

This means that if your financial gift takes your child’s savings pot over this limit, they could lose this benefit.

The key is to check carefully.

Useful sites for information on benefits include Adviceguide and Turn2us.

Thinking about signing property over to your children? Read this first.

Get great ideas for saving money, plus information on your consumer rights, pensions, tax and much more in our Money section.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.