Helping the next generation

Allowances and rate bands for children

When it comes to tax, children are treated independently, having their own personal allowance, as well as their own savings and basic rate tax band. They also have their own capital gains tax annual exemption.

Who helps?

Transfer of an income-producing asset to a child can be beneficial, but when your children are under 18 years old, a parent-child transfer isn't usually the most tax efficient route. If annual income from this source is more than £100 gross, it's still the parent who gets the tax bill. But if the gift is made by someone else - say, grandparents or other relatives, income arising is taxed on the child. Where there is scope within the family to divert income to a child like this, it could be the optimal way to pass tax free income to a child.

Two-sided equation

Helping the next generation can bring tax advantages both ways. For the giver, it can form part of inheritance tax (IHT) planning, with some lifetime gifts across the generations being exempt from IHT. There is, for example, an annual exemption allowing you to make gifts to the value of £3,000 in any tax year. These are then ignored when valuing your estate on death. If unused, the annual exemption can be carried forward into the next tax year: but if not used in this year, the brought forward allowance is lost. Gifts made out of income, rather than capital, are also free of IHT. To qualify, these must not diminish your normal standard of living, and should be something you provide regularly. Taking something from surplus income and putting it into savings for a grandchild could be one way to take advantage of this. It's always advisable to discuss the rules in detail first, so do please talk to us for more advice in this area.

Tax free saving

There are opportunities to make tax free savings for your children. Since the 2011 closure of Child Trust Fund (CTF) investments to new applicants, the Junior ISA is a main route here.

Children who are UK resident, under the age of 18, and do not have a CTF, are eligible for a Junior ISA. Both Junior ISAs and CTFs give parents, other family members or friends, the opportunity to invest a certain amount in a tax free fund each year. The limit is £4,368 in 2019/20. As with CTFs, there is no access to the funds until the child reaches age 18, although they can take control of the account at age 16. The government does not contribute to Junior ISAs.

2020 is a milestone for CTFs, with the first CTFs maturing as beneficiaries start to reach age 18. New regulation is forthcoming from 6 April 2020, so that the tax-advantaged status of the investment is retained when it matures. This will allow CTF account holders to transfer the investments to an ISA of their choice when the CTF matures, without prejudice to their annual ISA subscription limit.

Tip: 'lost' Child Trust Funds

Where regular contributions have been made, CTFs may now form a significant investment. M ore than 1 million CTF accounts, however, are thought to be 'dormant' – holding just the initial contributions made by the government. If you think your child may have a CTF, but can't remember more details, you can find out using links from this page .