Money from Grandparents

Money from grandparents, relatives or other adults – any income arising from this money is treated as the child’s own. Like adults, children have their own personal tax allowance, which is £4,745 for the 2004/05 tax year, so any income they receive within that limit on this money will be free of tax. These rules apply to all types of income.

In the case of bank and building society accounts, you can prevent any tax being deducted from the interest on your children’s savings by completing Inland Revenue form IR85, which will register your child as a non-taxpayer. Your branch should be able to provide this form. This registration will be valid until the child reaches age 16, when they will have to re-register personally. If tax has been deducted it can be reclaimed up to six years later. You will need to contact your tax office for details.

Share dividends (which include income paid by most investment trusts and unit trusts) are paid to investors net of a ‘tax credit’, currently 10%. Basic and lower rate taxpayers have no further tax to pay. But even though children are normally non-taxpayers, they cannot reclaim this tax. So, choosing shares or trusts that are more capital growth oriented is more tax-efficient, as these gains are usually tax-free.