Child Taxation: 2. Parental Settlements

Published / Last Updated on 28/07/2021

It is already established that children are taxable in their own right for earned income, investment income and capital gains tax.  Likewise, this means that also have a full personal income tax allowance and capital gains tax allowance meaning that in most cases, unless they are child ‘stars’ they pay no taxes.

This may lead to many parents thinking to settle money into their children’s names to avoid tax.  This is not the case under the Income Tax (Trading and Other Income) Act 2005 (ITTOA 2005) whish includes anti-avoidance measures meaning that many settlements by parents in the child’s name will be taxed as if it is the parents income or gains provided the income does not exceed £100 per tax year.

If money is invested by parents via an absolute (bare) trust i.e.  it cannot be changed it is permanently in the child’s name or an interest in possession trust (flexible – i.e.  beneficiary name can be changed e.g.  to another child or relative) set up by the parent, if the income is over £100 pa, it is taxed on the parents income.

Before 9th March 1999

Where a trust was set up by parents before 9 March 1999 and provided no more assets have been added to the trust, it is not assessed or taxed on parental income. 

After 9th March 1999

Over £100 rule, it is assessed for income tax on parents income.

Capital Gains Tax

It should be noted that the above income rules do not apply to capital gains taxes.  If the child is entitled to income and gains under the trust, capital gains tax is assessed on the child and not on the settlor (person making the gift).

Insurance Investment Bonds

Chargeable events under an insurance bond e.g.  withdrawing more than 5% of the original investment in a year are assessed on the settlor (person who paid into the bond for the child).  If a bond is set up inside an absolute (bare) trust then the settlor (person making the gift) then capital gains are taxable under the child’s name irrespective of who set it up e.g.  parent or grandparent.  If a parent set up the bond and the income exceeds £100 then this is subject to parents income tax.

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