It might seem a long way off, but if you want to give your little one a helping hand when they fly the nest it’s wise to start now.

Whether you’re knee-deep in nappies or paying for school trips or tuition fees, life with kids can be expensive. So putting something aside for their future makes sense. Here’s a look at how you can start a nest egg.

Giving money if you’re a parent or step-parent

There’s no limit on how much parents or step-parents can give to children or invest on their behalf, but you may have to pay tax on the interest if the interest earned exceeds £100. Each parent has a separate £100 limit, so if both parents contribute equally your child could get interest of £200 a year without either of you having to pay a penny in tax on it.

Giving money if you’re a grandparent

You can give as much as you like to your grandchildren and the interest will never be taxed as your income. However, the children may have to pay Inheritance Tax on the amount they receive and pay tax on their interest as well.

Tax on children’s income

Children have a personal tax-free allowance each year (£5,225 for the 2009-2010 tax year). This means they can have income (including interest) up to this amount in the year without paying any tax. A parent can apply to have their child’s bank or building society interest paid without tax being taken off if:

• The child’s income is less than their tax-free allowance.
• The child doesn’t get more than £100 interest each year from money given to them (or invested for them) by a parent.

Download the R85 Helpsheet and R85 Form from HM Revenue & Customs. Once you’ve checked your child is entitled to get their interest without paying tax, give the completed form to the bank or building society.

Inheritance Tax on gifts

If you give money to your children or grandchildren, Inheritance Tax exemptions may mean that tax does not have to be paid on it.

• You can give away £3,000 in each tax year without paying Inheritance Tax, which you can carry forward to the next year only if not used. This means you could give away up to £6,000 in any one year if you hadn’t used any of your exemption from the year before.
• If you die within seven years of giving gifts exceeding £3,000, there might be some Inheritance Tax to pay. Putting money into a family trust

You can use a family trust to look after money and provide an income for children who can’t manage their own affairs. You will need to get legal advice and tell your Tax Office if you set up a trust.

Where to get more information

For more information on the best ways to gift money to children or grandchildren visit Directgov.

IMPORTANT NOTE: This feature is for guidance only and is not intended to be a substitute for professional financial advice.