Giving tax free gifts to children is beneficial to both parents and their offspring. The children benefit because they receive non-taxed monetary gifts, and parents benefit by reducing their taxable assets. Tax free gifts may be given to both minors and adult children, although there are different methods of transferring the funds to an adult or child.
Rules for Tax Free Gift Giving
A tax free gift given to a child must be money given as a true gift, not an exchange for a product or service. In addition, it must be given with the expectation that only the gift itself is non-taxable. If income is earned from the gift, such as dividends on a stock, that income can be taxed. Parents can not claim a tax deduction for the gifts given to their children.
Tax Free Gift Allowances
A parent may give each child £8,450 annually, or the parents may jointly give each child £16,900 per year. Larger gifts may be given, but the gift amount larger than the designated tax-free amount will be taxed.
How Gifts May Be Given To Children
Gifts may be given to children in the form of cash, investments, stocks, mutual funds or property. If property is given as a gift, the donor and recipient must know the current value of the home in order to properly state the amount that must be reported on a gift tax return. If the child is a minor, gifts can be placed in a UGMA (Uniform Gifts to Minors Act) or a UTMA (Uniform Transfers to Minors Act) account. Financial gifts, stocks and bonds can be placed in the account. The account is placed in the child's name with an adult custodian until the child comes of age and fully becomes the child's.
Reasons To Give Children Monetary Gifts
Tax free gifts are beneficial because they do not produce deductions for the donor or income for the gift recipient. Gifts are not considered income and are not reported on the recipient's income taxes. In addition, even if gifts do exceed the monetary limits, the gift recipient will not have to pay taxes on the donation. The donor, however, may have to pay gift taxes.