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Tax on gifts from parents to children?

Kids | Saving for Children Helpful? 28

Asked by Nicholas01, submitted 24 June 2010.

Open Quote How much can parents give their children a year without running into any tax problems? This would be as straight cash as a gift and not wrapped up in a complex trust fund. Two examples:

1. How much can I give my two children aged 10 and 8 (so non-taxpayers)?
2. How much can my parents give me?

I am a highrate taxpayer (40%) and both my parents are retired OAPs. Thank you.
End Quote

Answered by Justin on 25 June 2010

You can give your children as much money as you want, but if interest and/or dividends exceed £100 a year the income will be taxed as yours. Assuming interest of 3% you could gift around £3,300 without breaching this limit.

However, the £100 limit is per child per parent, so it’s possible for a couple to give away a total of about £13,200 at 3% interest before they’d both be liable to tax rather than the children.

This rule doesn’t apply to grandparents, so they could give as much as they want to your children without any tax implications (except, potentially, inheritance tax – I’ll cover that in a moment). Just remember that if a child’s income exceeds £6,475 a year (£7,475 from next April) then they’ll become a taxpayer – exactly the same as an adult.

If the £100 limit is an issue you could consider investing in a growth investment fund or shares. When held in a bare trust (just means completing a simple form) gains and dividends are taxable as the child’s provided the £100 income limit isn’t breached, which it shouldn’t be on a growth investment. However, this would mean owning stockmarket investments which are not without risk and you would have no further rights to the money (i.e. you can’t take it back a year or two later).

Your parents can gift you as much as they like to you (the £100 rule doesn’t apply because you’re over 18) but there might be inheritance tax implications.

They can gift any amount and provided they live for at least 7 years after making the gift then it’ll fall outside of their estate for inheritance tax purposes. The proviso is that they mustn’t continue to benefit from the gift – e.g. they can’t give you a house and continue to live in it without paying you a commercial rent.

They can also give away up to £3,000 each a year that will fall outside of their estate immediately (they can also use the previous year’s allowance if unused). The same also applies to individual gifts of up to £250, of which they can make as many as they like.

If they have surplus income (perhaps from a pension) they can make regular gifts from this that will also fall outside of their estate immediately.

Otherwise gifts made by your parents will be treated as ‘potentially exempt transfers’, which means some or all of the gift could remain liable to inheritance tax if they die within seven years.

To find out more take a look at our inheritance tax page.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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