Taxing times for children?

A detailed look at taxation and the under-18s

Subject to some exemptions, a child may have taxable income which is chargeable; however, the child will have full entitlement to personal allowances and reliefs.

The rights and obligations of a child with taxable income rest with the child, although his/her representatives are able to act on the child’s behalf under general law.

A child is less than 18 years old.

In England and Wales the testamentary age is 18, whereas in Scotland it is 12. This is the minimum age people are legally allowed to make a will. There are two exceptions which are:

  • soldier on active duty
  • sailor at sea.

In these limited circumstances the child can be any age. These exceptions have been in place since 1918, the year World War 1 came to an end. It was realised that young people can be placed in dangerous situations during the course of active duty, or whilst working at sea, and should have the opportunity to record their wishes.

The youngest age a child can work part-time is 13, except children involved in areas such as television, theatre and modelling. A performance licence is required in these circumstances.

Children can only start full-time work once they have reached the minimum school leaving age. The specific dates are different for England, Northern Ireland, Scotland and Wales, although the child has to be over 16 years of age.

Children and companies

There is no statutory provision prohibiting a child from owning shares. However, some companies will not accept shareholders under the age of 18 years by provision in their articles or terms of issue.

The issue to children of shares in the family company was held to be a settlement with the result that dividends were taxable as the parents’ income (Bird v HMRC [Sp C 720]).

Subject to very limited exceptions, a child under the age of 16 cannot be appointed as director of a company (CA 2006 s157).

Gifts to children

If a parent gives an asset to their child then the income arising on that asset (subject to certain exceptions) will be treated as income of the parent and not the child for tax purposes. This would cover assets such as money (earning interest), shares (receiving dividends) and property (receiving rental income).

The initial transfer would be subject to capital gains tax as the transfer would be to a connected party and therefore would be deemed to occur at market value, then the income would be treated as the parent’s income until the child reached the age of 18, after which the income would be treated as that of the newly adult son/daughter.

However, if the aggregate amount that would otherwise be treated as the parent’s income for that year in relation to any particular child does not exceed £100, then that income is not treated as the parent’s income but is treated as the child’s income.

Children can earn up to £100 per annum in interest on money given to them by a parent and that income will be treated as income of the child for tax purposes. If the child gets more than £100 in interest from money given by a parent then the parent will have to pay tax on all the interest if it is above their own Personal Savings Allowance and that parent will need to put the entry on their individual self-assessment tax return.

This only applies for transfers between parents and children, so if a grandparent gifts an asset to a grandchild the future income from that asset would be treated as that of the grandchild for tax purposes.

Child Trust Funds

A Child Trust Fund (CTF) is a long-term tax-free savings account for children. There is no tax on the income or gains of a CTF. Similarly, there are no tax charges when the fund matures on the child’s 18th birthday. No CTFs can be opened for children born after 2 January 2011. With effect on and after 6 April 2015, all the savings in a CTF can be transferred to a junior ISA for the child in question, with the CTF then being closed.

Anyone (including the child) may make payments into the CTF, although there is a limit of £4,368 (£4,260 before 6 April 2019) for any one year (the subscription year). A subscription year is the period from the opening of the account to the child’s next birthday, and each succeeding period of 12 months.

Withdrawals from the account are not permitted before the child reaches the age of 18 except in three circumstances as follows:

  • the account provider is allowed to make deductions in respect of management charges and incidental expenses.
  • where the child is terminally ill.
  • where the child dies before reaching 18.

Junior ISA (Individual Savings Accounts)

There are two types of Junior ISA:

  • cash Junior ISA
  • stocks and shares Junior ISA.

The child can have one or both types of Junior ISA. All income and gains are tax-free.

The Junior ISA belongs to the child; the parents or guardians will usually manage the account, although the child can manage the Junior ISA if the child is over 16 years old.  

Children and contracts

For a contract to be valid all parties must have the ability to understand the terms and any obligations of that contract. In general children under 18 lack the capacity to enter into a contract unless the contract is for necessities (food and clothing) or education (eg apprenticeship or schooling) or employment and the terms are fair and benefit the child.

The law presumes that children under seven years of age do not have the power to enter into a contract. Although a minor between seven and 18 can enter into a contract there is a presumption that they do not understand the implications of entering into the contract. This means that the minor is able to cancel a contract at any time before reaching the age of 18, and for a reasonable period afterwards without valid reason.