Be aware that children have tax allowances too

There are a number of ways in which tax laws can affect children long before they start earning. Being aware of the rules can enable you to make substantial tax savings.

Most importantly, remember that your children have a personal allowance, just as you do, and it applies to any income they may have from investments as well as any earnings. It's not possible for you as a parent to give substantial sums to your children for them to invest simply in order to use their tax allowance. Other people such as grandparents may do this, as birthday gifts for example, but not the parents themselves as any income will be taxed as theirs.

There is one important exception to this rule, though. Up to £100 in each tax year which a child earns as a result of a parent's gift will be treated as the child's own income. But if the sum goes over £100, then all the income is treated as that of the parent. So do your calculations carefully. Note though that National Savings & Investments Children's Bonus Bonds are exempt from this rule. There is a further disadvantage if you go over the £100 limit. If this represents interest from a bank or building society, your child may not be able to receive the income gross, without deduction of tax. This is because the income will be treated as yours. So, unless you're a non taxpayer you'll not be able to make the appropriate certification to the bank or building society.

Children also have a capital gains tax allowance. As you've seen, if you make a gift of shares to your children, you will be responsible for paying tax on the dividends, unless they're below £100 in each tax year (when taken with any other income the child has as a result of your gifts). But the capital gains are tax free up to the exemption limit, regardless of the origin of the capital used to buy the investments.