Can Your Kids Help Lower Your Tax Bill? HEATHER ROGERS Explains

One of the questions I often get is whether I can put money or assets in my children’s names to save taxes.

A common variation of this is: ‘Can I use the personal deduction of my minor children and pass on part of my income to them?’

It is true that your child has his or her own personal budget, but if your child is under 18, this is not so simple.

A similar question I get from parents with a small family business is whether they can give their children shares in the company.

This too is not easy: there is a lot of legislation, both fiscal and legal, that can confuse the unwary.

Let’s take a look at the rules and what you can and can’t do in this area, so that parents can get a better idea of ​​what they can expect.

What is HMRC’s position on putting assets in your children’s name to save tax?

From HMRC’s point of view, everything is set out in the Income Tax (Trading and Other Income) Act 2005.

If the parent retains an interest in an asset and it can still be used for the benefit of the parent or his/her spouse (for example by passing on income from an asset to their minor children), the Tax Authorities will treat this under the so-called settlement legislation.

Without getting too technical, a settlement can:

– Means any agreement, arrangement or transfer of assets; and

– There must be a ‘generous arrangement’

So, what does “bounteous” mean in this context? This is the key to understanding the situation.

Suppose a parent transfers income to a child, the child will have a lower tax liability than the child.

In this case, there would be a ‘reward’, because the parent would effectively retain an interest in the income-producing asset. The income would undoubtedly flow to the household, just as it did before the arrangement came into effect.

Such a transfer would be easily challenged by HMRC. And in these circumstances the income would still be taxable to the parent (known in legal jargon as the ‘settlor’).

This does not only apply to arrangements with minor children. It can also apply to transfers of assets to other family members or friends, where a settlor can benefit from such an arrangement.

The question is whether there is a transaction on an independent basis.

Would you make the same payments to a person who had nothing to do with it? If you didn’t, it would probably be considered a ‘generous’ arrangement and fall under the legislation.

There are some important exceptions worth noting that are not against the law. These are as follows:

– An outright gift between spouses or registered partners without any restrictions, retained interest or conditions attached to the assets;

– A benefit under a relevant pension scheme;

– Income from settlements made by one party to the other party following a divorce or separation agreement;

– Commercial transactions.

What if you can argue that this is not a generous arrangement?

If the transaction between a parent and a minor child does not fall under the rules I have already explained, then it falls under Article 629 of the same legislation I mentioned above.

This effectively means that income arising from a settlement will still be considered income of the donor if it is paid to or for the benefit of a relevant child of the donor.

A relevant child is a child or stepchild who is not married and does not have a registered partnership.

This means that if a parent gifts shares to a child without leaving an interest and there is no clearly generous arrangement but solely for the benefit of the child, the income, if it is more than £100 per annum, will be taxed in the hands of the parent.

Each parent gets £100 pocket money, so if two parents donate money, the child can earn £200 a year.

If you have more children, the income will be taxed at the parents’ expense.

This may also include income from a bank account if the parent(s) give money to the child.

The same rules apply to trusts where the parent company is the founder.

If they set up a trust for the benefit of their minor children, they will be taxed on any income they generate, or in the case of discretionary trusts, on any payments made for the benefit of the child, until the child turns 18.

For example, the rule does not apply to grandparents. They can therefore donate money for the benefit of a child without restrictions.

What are your options if you want to transfer your assets to your child?

When a gift is made all at once, without an interest being retained, a grandparent or someone other than a parent can make a settlement in a trust, give money to a child for the child’s benefit, or give other assets.

It should be clear that it is the grandparent, or another person, who makes the arrangements themselves and not through a parent.

You do need to be careful, though, as indirect donations may fall under the law.

For example, suppose the parent gives an asset to the grandparent, and a few years later the grandparent gives the asset to the child.

In that case, the income arising from this asset may be taxed in the hands of the parent company, even if it has no interest in it, because it can be considered as the settlor.

Of course, gifts of assets may be subject to other taxes, such as capital gains tax, or may be considered gifts for inheritance tax purposes, or may be subject to inheritance tax as a taxable lifetime transfer if given in trust.

Once children reach the age of 18, gifts can be made, provided that the parent no longer has an interest in the assets or their income.

In the case of assets jointly owned by a parent and a child, the child should have complete freedom regarding his/her share of income, so that he/she can spend as he/she pleases. The child should also be equally responsible for his/her share of the maintenance of the assets.

What if you want to involve children in your private business?

If you want to donate shares to minor children, all the rules described above apply.

If you want to involve them in a business, such as setting up a family investment company, you should seek professional advice, as it can quickly become complicated.

In a private limited company, shares can in theory be held by a minor, unless this is prohibited in the articles of association (the written rules for the management of the company by the directors and shareholders).

However, the shares may carry rights that are not normally attached to the child’s shares, such as voting rights.

And a child who owns shares can pose problems because he or she is a minor and therefore cannot enter into a contract unless that contract relates to so-called ‘necessities’ – housing, food, clothing – or to education, apprenticeships and employment.

A child cannot be a director of a private limited company until he or she is 16 years old.

What else do you need to know?

In listed companies, children are normally not allowed to own shares until they are 18. However, they can be held in trust, for example if they are inherited.

A child cannot legally own residential or commercial property. Any property the child owns will most likely be held in trust until they are 18.

A child can have a bank account that pays interest and of course you can also open a Junior Isa for him or her, where the money is tied up and the child only has a say in it from the age of 18.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is here to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, you can email her at taxquestions@thisismoney.co.uk.

Heather will do her best to respond to your message in a future monthly column, but she cannot reply to everyone or correspond privately with readers. Nothing in her responses constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

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If Heather can’t answer your question, you can Find out here how you can get help with your tax return, including resources for free professional advice if you are older and/or have a low income.

You can also contact MoneyHelpera government supported organisation that provides free financial assistance to the public. The number is 0800 011 3797.

Here, Heather shares tips on how to find a good accountant, including when to seek help, the right type of firm to hire, and typical costs.