Every parent wants to save as much as they possibly can for their child, yet it is easy to lose out if you aren’t careful, says Faith Archer in The Daily Telegraph. New research from the Halifax has revealed that the Government is taking more than £13m a year from children’s savings accounts and that one in five parents have failed to register them for tax-free interest by filling in form R85.
Which accounts are tax-free?
This is not to say that children’s savings are automatically tax-free. Like adults, children have a personal tax allowance of £5,035 for the tax year 2006 to 2007. As long as their annual income, including interest, is below this amount, they should be able to receive interest tax-free. To do this, parents or guardians need to fill in form R85 for each account. To claim back any tax that shouldn’t have been paid, make a separate claim to HMRC using form R40.
There is a caveat, however. If the money is a gift from a parent and the income exceeds £100 a year (£200 if both parents made the gift), all the interest will be taxed as if it belongs to the parent. This means that if a parent gives a child £2,000, which earns £98 interest, that account can be registered for gross interest. But if the £98 is added to the account, leading to £101 interest being earned in year two, the interest has now exceeded the £100 limit and the account cannot remain registered gross.
So to boost your children’s savings, it makes sense to look at other options.
Child Trust Fund accounts
If your child is born after 1 September 2002, he or she will receive a £250 Child Trust Fund (CTF) voucher and you can pay a further £1,200 a year into the CTF account, tax-free. Bear in mind this money can’t be touched until they are 18 – and then as a parent you won’t have any say over how they spend it. For older children – dubbed the COTS (Children Over-Taxed on Savings) – the Government has been less kind. They have to wait until 16 to open a cash Isa, or until 18 to invest in an equity Isa. It makes sense to persuade friends or relatives to save on behalf of your child (remembering to fill out an R85 for each account). They can give as much as they like; provided it’s a genuine gift, the £100 limit won’t apply.
Bare trusts
Another option is a bare trust. With a bare trust you as trustee hold shares beneficially for your child: you are the legal owner, but your child is the beneficial owner, or the owner for tax purposes. This can be useful, since children are entitled to their own capital-gains exemption, currently £8,800, from the time they are born. Bare trusts are also a good way of teaching children about the benefits of saving and awakening an interest in shares that, long term, are likely to outperform a cash account.