If a parent gives money or assets to their own child who is under 18 and unmarried, and the income from that gift is more than £100 in a tax year, all of that income is taxed as the parent’s income, not the child’s. The limit applies separately to each parent and each child, and it is all or nothing: £101 of income means the whole £101 moves to the parent. Gifts from grandparents and other relatives, and money in a Junior ISA or Child Trust Fund, are outside the rule.

What does the parental settlements rule say?

The rule is in section 629 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Income that arises under a settlement is treated as the income of the settlor, and of the settlor alone, for a tax year if it is paid to or for the benefit of a relevant child of the settlor, or would otherwise be treated as that child’s income. A relevant child is a minor (under 18) who is not married and not in a civil partnership. A child includes a stepchild, and HMRC’s guidance at TSEM4300 confirms this covers the child of a civil partner.

The word settlement is far wider than a formal trust. Section 620 defines it to include any disposition, trust, covenant, agreement, arrangement or transfer of assets. HMRC’s manual at TSEM4105 states that this includes a simple gift without any deed. So a parent paying cash into a child’s savings account, or transferring shares into the child’s name, has made a settlement. The courts require an element of bounty, meaning value given without anything in return (TSEM4110, citing CIR v Plummer), and a gift to your own child is bounty by definition.

The rule exists to stop parents moving income to children who can use their own Personal Allowance and lower rate bands. It does not stop the gift itself; it only decides whose income the return is for income tax.

How does the £100 limit work?

Section 629(3) switches the rule off for a tax year if the child’s relevant settlement income from that parent does not exceed £100. Three features catch people out:

  • It is not an allowance. Once the income from one parent’s gifts goes over £100, all of it is taxed on the parent. In HMRC’s example at TSEM4310, a daughter with £105 of interest from her father’s gifts has the whole £105 treated as his income, while her sister with £50 keeps hers.
  • Each parent has a separate limit. In the second TSEM4310 example a son has £80 of building society interest from his father’s gifts and £120 of dividends on shares from his mother. The £80 stays the child’s; the full £120 is the mother’s. Had one parent made all the gifts, the whole £200 would have been that parent’s.
  • Each child is separate. The test is applied to the income of each child from each parent, so two parents with three children have six separate £100 tests.

Once income is treated as the parent’s, it is taxed as if it had arisen to the parent directly, at the parent’s marginal rate (TSEM4573). GOV.UK’s guidance on children’s savings puts it simply: the parent pays tax on all the interest if it is above their own Personal Savings Allowance. A basic rate parent with unused allowance may therefore still owe nothing, but the income has to be counted.

Which gifts and accounts are outside the rule?

GOV.UK states that the £100 limit does not apply to money given by grandparents, relatives or friends, or to money in a Junior ISA or Child Trust Fund. Income in a Junior ISA is tax free in any case. For the 2026 to 2027 tax year the Junior ISA subscription limit is £9,000, anyone can pay in, and the money belongs to the child and cannot be withdrawn until they turn 18.

Two limits stop families getting round the rule through other relatives:

  • Reciprocal arrangements. Under section 620(3)(c) a person who arranges for someone else to make a settlement is treated as the settlor. TSEM4125 gives the example of an uncle funding his nephew’s shares while the aunt funds her niece’s building society account; each parent is treated as settlor of the gift to their own child.
  • Indirect gifts. In a TSEM4300 example a director lets his mother subscribe £40 for 40% of his new company’s shares, and she then gives them to her grandchildren. HMRC treats the director as the true settlor because issuing the shares at par was the bounteous act, so the children’s dividends are taxed on him.

Section 629 is an income tax rule. It does not move capital gains to the parent. HMRC’s guidance on bare trusts at TSEM1563 confirms that the beneficiary of a bare trust is taxable on the trust’s gains.

How are shares in the family company treated?

Gifting shares in an owner managed company to children under 18 is one of the situations HMRC lists at TSEM4325 as commonly caught. The TSEM4300 example is direct: Mr and Mrs X each give 10 shares to each of their children aged 12 and 15, and the dividends paid to the children are treated as the parents’ income. The same applies if a parent waives a dividend so that more is paid on shares held by a minor child; TSEM4220 says section 629 applies in that case (see dividend waivers).

This is why family investment companies and growth share structures for children need careful design: the shares may sit with the children, but dividends paid while they are minors are usually taxed on the parent who provided the value. Dividends taxed on a parent are taxed at the parent’s dividend rates.

What about trusts set up by a parent?

The treatment depends on the type of trust and when it was made.

Type of parental trust Income tax treatment while the child is a minor
Bare trust made on or after 9 March 1999 Income is the parent’s even if the trustees keep it and pay nothing out (TSEM4300).
Bare trust made before 9 March 1999 Only income actually paid to or for the child is caught; income from funds added on or after 9 March 1999 is caught (TSEM4305).
Interest in possession trust with the child as life tenant The child’s share of income is the parent’s (TSEM4300).
Discretionary or accumulation trust Caught when payments are made to or for the child, out of income or out of capital to the extent retained income is available (section 631).

GOV.UK explains that for parental trusts the trustees pay income tax through the Trust and Estate Tax Return, but the settlor is responsible for it and receives a statement of the income and tax. The parent then gets credit for tax the trustees have paid (TSEM4573).

A worked example

Illustration only. Sam and Alex have two children, aged 9 and 14, and no Junior ISAs. In the 2026 to 2027 tax year:

  • The 14 year old earns £130 of interest on cash given by Sam. That is over £100, so all £130 is Sam’s income for tax. If Sam is a basic rate taxpayer with Personal Savings Allowance to spare, no tax may be payable, but the income belongs on Sam’s side of the calculation.
  • The 9 year old earns £70 of interest on Sam’s gifts and £60 on Alex’s gifts. Neither parent’s figure exceeds £100, so the full £130 stays the child’s and is normally covered by the child’s own Personal Allowance.
  • Both children also earn interest on £2,000 each from their grandmother. That interest is the children’s own, whatever the amount.

If the 9 year old’s gifts had all come from Sam, the combined £130 would have been Sam’s. Keeping each parent’s gifts separate, and keeping a record of who gave what, changes the result.

How should a parent structure gifts to a child?

  • Use the Junior ISA first. Parental money in a Junior ISA, up to the £9,000 limit for 2026 to 2027, is outside the £100 rule.
  • Keep grandparent money separate. Hold gifts from grandparents and other relatives in a different account from parental gifts, so it is easy to show HMRC where the income came from.
  • Watch the £100 edge. Because the limit is all or nothing, a small rise in interest rates can move the entire figure onto the parent.
  • Consider growth rather than income. The rule catches income, not gains, so investments that produce growth rather than interest or dividends shift less income back to the parent.
  • Avoid swaps. A reciprocal deal with another family is treated as each parent funding their own child.

How is the income reported and what goes wrong?

GOV.UK tells parents to tell HMRC if, in the tax year, the child gets more than £100 in interest from money given by a parent. A parent who files a Self Assessment return includes the income there; see Self Assessment deadlines and penalties. The child must also tell HMRC separately if their own income, such as from a non parental trust, exceeds their Personal Allowance.

Common mistakes are treating £100 as a tax free slice rather than a cliff edge, adding both parents’ gifts together or failing to keep them apart, assuming income retained in a bare trust is not caught, forgetting dividends on family company shares, and moving money through a grandparent who was simply passing on the parent’s own funds. HMRC looks at the whole arrangement, not just the name on the account.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.