“Err…. because they’re 9 and 12 years of age!?” I can’t remember how many times I have had this conversation with clients.
Splitting income between a parent and a minor child is not easy unless it can be accumulated until they reach the age of 18, and the family has no immediate need for the income.
Anything above the de-minimis exemption of £100, will be taxed on the parent who made the initial gift to the child. It’s as simple as that.
At this point, it is worth point out, that if income is received by the trustees of a children’s settlement, then this will be taxed on the trustee(s) at the appropriate rate. So long as this income is accumulated and not paid to the child until their 18th birthday, it will then be treated as the child’s income. This is a great and simple way to help finance university costs!
However, with parents fixation on income, they’re missing a trick. Gift funds to the child direct and invest for capital growth rather than income. There is no equivalent legislation for capital gains as there is for income tax, and each child has his own annual CGT exemption of £12,000, and their own 10% and 20% CGT rates.
Therefore, if you invest in say preference shares with zero-coupon, no income can be taxed on the parent and the first £12,000 of any gain will be tax-free in the hands of the children.
There are many tax planning opportunities out there, but they must be viewed holistically; these are not one-off transactions.
These new shares could be in your own trading or investment company and could form part of a wider family life tax planning exercise.
Speak to your tax advisor to explore these options, as they should already be speaking to you, if they’re not……then why are you with them?