LETTING & ESTATE AGENT

Making the Most of Your Children!

Making the Most of Your Children!
Rules exist that prevent parents handing over large sums of money to their children in an attempt to avoid paying tax on it themselves. You can’t simply switch money from your own savings account to one opened in your child’s name to avoid paying tax on the interest. So what can you do? If you give a sum of money to a child under the age of 18, HMRC will generally deem that the money still belongs to you and you will be taxed on the interest that the money in your child’s bank account earns. There is a small exemption to this rule – no tax will be payable if the annual interest on all savings accounts is not more than £100 per parent, per child, per tax year. As long as this limit is not exceeded, HMRC treat any interest earned on the gift as belonging to the child. Therefore, when the child’s total income for the year is less than the annual personal tax-free allowance (£7,475 for 2011–12) a parent or guardian can reclaim any tax deducted from the child’s savings by the bank or building society by completing HMRC form R85. This form can be downloaded from HMRC’s website (http://www.hmrc.gov.uk/forms/r85.pdf). Taking Pre-emptive Action Sensible inheritance tax (IHT) planning includes giving assets away that you can afford to dispose of before your death, in a tax-efficient manner. There are several ways that having children can help reduce the size of your estate (and in turn, its liability to IHT). • Annual exemption: You can give away up to £3,000 (cash or assets) a year with no IHT implications. Therefore, give a child £3,000 now, and you can save £1,200 (£3,000 x 40%) on a future IHT tax charge. The exemption (or any unused part of it) may be carried forward for one year. This means that a married couple could give away £6,000 free of IHT every year, or £12,000 in one year if no gifts were made in the previous year. • Gifts of interest: You can lend money to another individual interest free without having to account for IHT on the interest you give up. This exemption means you could, for example, help your children buy their first home. No limits exist, but the money has to be returned to your estate on your death. • Gifts on marriage: Parents can give up to £5,000 to children when they marry. Grandparents can give up to £2,500, and anyone else can give up to £1,000. Gifts can be made in cash or goods. The exemption is for each marriage. And if you have two children getting married in the same tax year, you can give each one the maximum. • Small gifts: Any number of gifts worth up to £250 each can be made without affecting any other allowance. However, you can’t give the same person more than one such gift in any tax year, or give up to £250 to someone who has already gained from one of the other exemptions. Nor can you give £300 and count the first £250 as exempt. If the gift is over £250, it counts towards the annual exemption. Practical Tip When deciding what to do with your estate, consider skipping a generation and leaving it to your grandchildren rather than your children. Youngsters have far longer to live than their parents before they have to worry about IHT issues. By Sarah Laing