Budget: Tax on Children's Savings

PARENTS WHO have been using a loophole which allowed them to avoid paying tax when they transferred money to their children will no longer be able to do so following this week's Budget.

Up to now, if a parent opened a savings account in a child's name, the account was allowed to earn up to pounds 100 interest a year before it became subject to tax. However, many thousands of parents have used trust law to avoid this tax law. They have set up a "bare" or accumulation trust, which meant the income in the trust became the child's. In turn, this allowed the child's own tax allowance to be used, saving a parent up to pounds 1,678 a year in tax.

Many fund management firms, such as investment trusts, have tended to incorporate bare trusts within the children's savings schemes they offered to the public, costing the Inland Revenue up to pounds 50m a year in tax.

From this week, new bare trust arrangements, or money added to existing trusts, will no longer be sheltered from income tax, unless the income is less than pounds 100.

Nic Cicutti