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Don’t fall into the gifting tax traps

New tax rules introduced in April have changed your options when investing for children.

If you give money or investments to your unmarried minor child, then the tax rules can catch you out. HM Revenue & Customs (HMRC) is suspicious that such gifts are an attempt to avoid tax on the part of the donor, so the law says that if the total income generated from all such gifts exceeds £100 in a tax year, that income is taxed as that of the parent. The rule operates on a per parent, per child basis, but it can still be difficult to avoid crossing the £100 threshold.

Several ways of sidestepping the problem have been developed over the years. The government has provided a partial solution by introducing the Junior ISA, which allows up to a total of £4,080 per tax year to be invested with no tax consequences upon parental donors, and no personal UK tax on the underlying investments.

Two new tax allowances, which came into effect at the start of this tax year, have changed the picture somewhat:

- The personal savings allowance means that if you are a basic rate taxpayer you can receive up to £1,000 in per tax year of interest free of tax. If you pay tax at 40% the allowance is £500, but there is no allowance if you are a 45% taxpayer.

- The dividend allowance gives you up to £5,000 of dividends free of personal tax per tax year, regardless of your tax rate.

Both allowances could be useful if a gift to a child would lead to the £100 threshold being breached. Unless the relevant allowance is exceeded based on the total of your and your child’s income, there will be no income tax to pay. However, direct investment in the name of a child is not always an ideal solution, as it gives the child access to the funds when they reach the age of majority, and there could be inheritance tax consequences.

You should therefore always seek advice before making gifts to your children.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.


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