Tax Freedom: When paying less can be child's play: Raising children is expensive - but there are ways to lighten the burden, says Andrew Bibby

Click to follow
The Independent Culture
SOME countries seem to welcome newly born babies with a touch more elan. Have a child in Finland, for example, and the state will supply you with a box of goodies, full of nappies, baby clothes, changing equipment - and a packet of condoms. Even the box itself converts into a cot.

No such largesse here, of course. But never mind: there is at least a tax allowance. From the moment each new baby Briton pops into the world, he or she is granted the standard single person's allowance by the Inland Revenue. In other words, the first pounds 3,445 they earn each year is tax free.

This might seem a curious sort of present for a child. But is it, perhaps, a useful break for parents looking for a way to reduce their tax bills? Is there a convenient tax haven located upstairs in the nursery?

Predictably, it is not quite as simple as that. The Inland Revenue looks closely at the amount of investment income which a child is earning on money given by the parents. If the interest reaches pounds 100 a year, it is taxed as if still belonging to the parent. What is more, in this situation the full amount of the interest becomes taxable: so while pounds 99 might avoid any tax, pounds 101 would be fully taxed, at the parent's highest rate of tax.

The threshold was raised from pounds 5 to pounds 100 three years ago, and applies separately to gifts made by each parent. At today's low interest rates, therefore, both parents could each pass about pounds 2,000 to their child before being caught by the rules.

The Revenue is only concerned with parental gifts. Interest from presents made by, say, a generous grandparent or godparent is taxable simply as the child's own income and can therefore benefit from the child's tax allowance. However, ownership of the assets must be transferred. There is no longer any tax advantage in covenanting a regular income to a child, as there was before the rules changed in 1988 (though it is worth keeping up with the payments on any covenants made before then).

Attempts to side-step the rules on parental gifts could count as tax evasion: you are not allowed to agree, say, at the celebratory reunion of the ante-natal class to give your friends' child Emma a generous gift in exchange for your own Jonathan receiving a similar amount. Like adults, children have their own annual tax-free limit - currently pounds 5,800 - for capital gains tax. Unlike income tax rules, advantage can be taken of this exemption even if the assets were originally a gift from the parents. But parents may find that, when they pass assets across to their children, they themselves are incurring a capital gains liability.

There is also inheritance tax to consider. Gifts may be potentially liable for this tax if the person making the gift dies within the next seven years. However there are exemptions. Small gifts worth up to pounds 250 each year to individuals are outside the inheritance tax net, and so are further gifts up to the current annual exemption limit of pounds 3,000. Gifts for the education of your children are also exempt.

As every parent knows, bringing up a child is an expensive business. For those with complex personal finances, there can be particular opportunities worth considering - for example, in some circumstances parents may feel that it is appropriate and advantageous to create a trust for their offspring.

But all parents can check that they have at least taken one simple step to save tax. Since the vast majority of children are non-taxpayers they are normally entitled to receive interest gross on bank and building society accounts. However, many children's accounts are still being credited with net interest. In other words, tax is being deducted unnecessarily.

The Inland Revenue estimates that only about 3.2 million of the seven million accounts held by non- taxpaying children have been registered for gross interest. 'We do tell people all the time to register, but we can't march people down to give them the forms,' shrugs a Revenue spokeswoman. The necessary form is R85, available from banks and building societies and also included in the Inland Revenue leaflet A Guide for People with Savings.

The tax savings you can obtain for your children in this way may be relatively small - but they should be more than enough to enable you to buy the Independent to collect our Tax Freedom tokens . . .

(Photograph omitted)