Children's savings: who gave the money can affect the tax

A savings account in a child's name is not automatically outside the parent's tax position. For certain gifts from a parent, interest above a small threshold can be treated as the parent's income.

The practical task is to track where the money came from and how much income it produces. That is different from deciding who owns the savings or when the child can spend them.

Understand the parental-gift rule

HMRC's children's-account guidance describes interest on money given by a parent to an unmarried child under 18. Where the relevant interest exceeds £100, it is treated as the parent's income under the rule.

The £100 figure is not a tax-free allowance that leaves only the excess attributable to the parent. Once the rule applies, the relevant interest as a whole needs to be considered in the parent's tax calculation.

It is also not a separate limit for every bank account. Splitting one parent's gift across accounts does not automatically change the underlying source of the money or remove the need to consider the total relevant income.

Work through a simple interest example

Suppose one parent gives £4,000 to a child and it earns an illustrative 4% over a full year, with no additions, withdrawals or rate changes. The interest is £160.

If the parental-gift rule applies, the relevant amount is £160 rather than only the £60 above £100. Whether tax is actually payable depends on the parent's wider position, including applicable allowances.

Now suppose the parent had given £2,000 under the same assumptions. Interest would be £80. This shows why both the balance and rate matter, but it is not a recommendation to manage an account to a precise threshold: rates, payment dates and additional gifts can change the outcome.

Record other donors separately

GOV.UK's savings-for-children page distinguishes money given by grandparents, other relatives and friends from the parental rule. It also identifies Junior ISAs and Child Trust Funds as outside this particular £100 limit.

For a mixed account, keep a record of each gift and its donor. An account balance alone cannot demonstrate how much arose from a parent and how much came from other sources.

If a large amount has moved through several relatives' accounts, ask for tax advice about the actual arrangement. Routing a parent's money through somebody else does not establish that it has become a different person's independent gift.

Do not confuse tax attribution with ownership

Treating interest as a parent's income for tax does not mean the savings should be treated casually as the parent's spending money. Establish the ownership and account terms separately.

For example, a parent may manage an account on a child's behalf while the money belongs to the child. The ability to operate an account is not the same as an unrestricted right to use it for unrelated personal expenses.

Document the purpose of substantial gifts and the intended access arrangements. If the family wants conditions that an ordinary child account cannot provide, obtain legal advice instead of relying on an informal note that contradicts the account structure.

Review tax records when rates or balances change

A gift that generated little interest at a low rate can produce a different result after rates rise. Regular additions can also make last year's calculation a poor guide to this year's position.

Keep annual interest statements and reconcile them with the gift ledger. If one parent funds several accounts for the same child, place those records together before assessing the rule.

HMRC's public guidance explains when to notify it. Where the records are mixed or other investment income is involved, ask an accountant to determine the attribution and reporting rather than assuming that the bank has calculated the family's tax liability.

Choose the account for the child's actual needs

Tax treatment is only one feature. Compare access, ownership, interest terms, investment risk where relevant and when the child can take control. A tax-efficient account with restricted access may not suit money needed for nearer-term expenditure.

Similarly, a high introductory rate should be assessed alongside limits and what happens when it ends. The purpose might be a short-term purchase, education spending or a gift for adulthood; those purposes do not necessarily point to the same account.

Bring the donor records, statements and objectives to any advice meeting. Related reading covers family school-fee planning, tax planning with an adviser and the accountant's role. Clear records are especially useful when grandparents and parents are supporting the same child through different arrangements.