Building for the Next Generation: Part 2
Key takeaways
Tax doesn’t always simply follow ownership
Specific UK and US rules can affect who ultimately pays tax when assets are held for children.
The source of the funds matters
Parent-funded assets can trigger the UK parental settlement rules or the US kiddie tax.
UK tax advantages may not carry across to the US
Structures such as JISAs can be tax-free in the UK while still creating US tax implications.
In part 1 we looked at the main structures. Now we look at the tax implications.
Understanding the tax
The general principle
All these structures typically involve the child becoming the beneficial owner of the assets.
As a general principle, income and gains follow beneficial ownership. However, both the UK and US have specific rules that can alter this outcome, particularly where assets are given to children.
Tax treatment can also differ depending on whether the assets are held directly, through a trust, or within a tax-advantaged wrapper such as a Junior ISA or SIPP.
US & UK tax treatment comparison matrix
US: The kiddie tax
The kiddie tax is designed to discourage families from transferring income-producing assets to children solely to obtain lower tax rates.
For 2026, the rules may apply where a child's unearned income exceeds $2,700. Broadly:
- The first $1,350 may be sheltered by the child's standard deduction.
- The next $1,350 is generally taxed at the child's own rates.
- Unearned income above $2,700 may be taxed at the parent's marginal rate.
The rules can also apply to certain full-time students under age 24.
As a result, ownership may sit with the child while part of the tax burden is effectively determined by the parent's tax position.
UK: The parental settlement rules
Where a parent provides assets for their unmarried minor child, any resulting income above £100 per year may be treated as the parent's income. If the income from a parent’s gift is more than £100 a year (gross), all of it, not just the excess, is treated as the parent’s income.
Importantly:
- The rules apply to income.
- They generally do not apply to capital gains.
- Gifts from grandparents are not usually caught.
- Gifts from other relatives are not usually caught.
As a result, it is possible for income to be taxed on the parent while gains remain taxable on the child. This is one reason the source of the funds matters as much as the structure.
Cross-border complications
Where a family has UK and US connections, the analysis becomes more complicated.
The UK wrappers are the most common trap. The US doesn’t recognise the JISA as a tax-free account, so a child who is a US citizen or resident can still owe US tax on the income and gains, even though no tax is payable in the UK.
The investments inside can add further tax complications (see Part 3). A bare trust may also raise separate US questions about how the arrangement is characterised and whether any reporting is needed. For a Junior SIPP, the US treatment depends on the UK/US tax treaty and on the child’s circumstances and often specific advice are often needed.
Looking ahead
Understanding who is taxed is only part of the story.
Families also need to consider gift tax exposure, estate tax implications, how accounts should be funded and whether the underlying investments are suitable for a child with UK and US tax connections.
In Part 3, we bring together the practical planning considerations for cross-border families.
Glossary
Beneficial ownership: The person who ultimately owns and benefits from an asset, even if it is held or managed by someone else.
Kiddie tax: US tax rules designed to prevent families transferring income-producing assets to children simply to benefit from lower tax rates.
Parental settlement rules: UK rules that can cause income from assets given by a parent to their minor child to be treated as the parent’s income for tax purposes.
This material is provided for informational purposes only and does not constitute investment advice or a recommendation. The views expressed reflect current market conditions and are subject to change without notice.
All materials have been obtained from sources believed to be reliable, but their accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may rise as well as fall, and investors may not get back the amount originally invested. Capital security is not guaranteed.
