Bank and building society interest - Children
Do children have to pay tax?
Yes. Children are entitled to income tax allowances in the same way as adults. And, depending on their income, they may or may not be taxpayers. If their total taxable income is less than the income tax personal allowances they are due, a form R85 can be completed so they receive their interest with no tax taken off.
So long as the child does not become a taxpayer, they can continue to receive interest with no tax taken off until the 5 April following their 16th birthday. At 16, they must complete a new form R85 and sign it themselves if their income is still less than their income tax personal allowance.
Children under 16 cannot sign the form R85 themselves.
A parent or guardian must complete form R85 with the child's details and sign it on his or her behalf. It cannot be signed by a grandparent, foster parent or trustee of the account unless they are also the child’s legal guardian.
The address on the form R85 must be wherever the child is living even if the person signing the form R85 lives at a different address.
Children
- under 16 in Scotland, or
- under 18 in England, Wales and Northern Ireland
cannot apply personally to get their tax back. A parent, guardian or trustee must do it for them.
They do this by completing a repayment form R40 (PDF 97K) – the R40 comes with notes, R40 notes (PDF 186K). But if someone is claiming on behalf of a minor as a trustee (for example, a grandparent who holds a bare trust account such as Mrs Smith re Miss Smith) they must enclose a statement of the minor's income and capital gains during the year of the claim. The minor's legal guardian must sign this statement.
If the child does not have a tax office the form R40 should be sent to
Leicester & Northants Area (Claims) Office
Saxon House
Causeway Lane
Leicester
LE1 4AA
The telephone number for Leicester & Northants Area (Claims) Office is 0845 366 7850.
£100 rule
There are special rules if a parent has given savings to their child. Where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent’s income. A child cannot claim back any tax on that income. Nor can interest be paid without tax taken off.
The £100 rule applies to young people until they reach 18 or marry (whichever comes first).
The £100 rule applies separately to each parent. It does not apply to gifts given by grandparents, other relatives or friends.
See an example of the £100 rule.
What happens when a child becomes 16?
Once a form R85 is completed for a child's account it allows interest to be paid without tax taken off. So long as the child does not become a taxpayer the form R85 can stay in play until the 5 April following the child’s 16th birthday.
If a child does not expect to have to pay income tax after that date - because their income will still be less than their income tax personal allowance - they can complete a fresh form R85 for interest to continue to be paid without tax taken off. The fresh form R85 can be completed at any time in the tax year in which the child will reach 16. A tax year runs from 6 April one year to 5 April the next.
See an example of a child becoming 16.
If an account is not held in the child's name, for example, if it is in the name of a parent or grandparent, it must be transferred into the child's own name in time for the first interest payment in the tax year after their 16th birthday. If it is not, tax must be taken off the interest.
See an example of a child becoming 16 when the account is not in their name.
Trust accounts
The most common type of trust account held for children is a bare trust. Bare trusts can be called by another name, e.g. re accounts or nominee accounts. An example of a bare trust account is ‘Mrs Smith re Miss Smith’.
A bare trust account held for a child can be registered for interest to
be paid without tax taken off by completing form R85. The form R85 must
be signed by the child’s parents or legal guardian.
So long as the child does not become a taxpayer, the form R85 can stay in
place until the 5 April following the child’s 16th birthday.
After the child has turned 16 the account must be transferred into their own name before it can be registered for interest to be paid without tax taken off. If the account remains as a bare trust account the interest must be paid after tax has been taken off.
See an example of a bare trust.
Different rules apply where a child is mentally incapacitated. Where a child who is mentally incapacitated reaches the age of 16, and their account has been registered by their parent or guardian, the registration may continue for the future. If the account is not already in the child’s name, it is not necessary for the account to be transferred into the child's name, or for the account to be re-registered.
See an example of a bare trust for a child who is mentally incapacitated.
