Income tax and gifts from parents

Inheritance tax

There are special tax rules which apply where a parent gives a child funds to invest. The tax rules say that any income received by a child on such an investment can be taxed as income of the parent where the income exceeds £100 per year. The limit applies per parent and a child for these purposes is anyone who is under 18 and unmarried.

There is no such limit for gifts by more distant relatives.

This means that grandparents could give money to their grandchildren without the income (i.e. interest received, share dividends) from the gift being taxed as income of the grandparent.

The limit for parents is an ‘all or nothing limit’. So if the income from a parental gift is £99 per year it is taxed as income of the child, but if it is, say £102, then it is all taxed as income of the parent.

Where the income is taxed as that of the child, then he or she may use his or her own tax free personal allowance against the income (£8,105 in 2012/13). For dividend income this would produce no advantage as the tax credit on dividend income is non-refundable. However interest could be received without deduction of tax, or a refund claimed if tax had been paid at source.

More information is available on the  HMRC children’s page http://www.hmrc.gov.uk/tdsi/children.htm

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