My son was left some money by a grandparent seven years ago, which we invested in a bond for three years. When it matured, a large percentage of it was loaned to me, his mother. A loan agreement was drawn up at the time, with more interest being repaid to my son than being available through bonds. The loan has now been repaid. Subsequently, all the inheritance from the grandmother (plus family loan interest) is now in a child's savings account. That account attracts more than £1,500 interest per year, and I'm now concerned that it has been ‘given by a parent’ and will be taxed as such at the parents' tax bracket. What can we do to avoid any issues? 

Arthur Weller replies: 

Very strictly speaking, you are okay. The original capital came from a grandparent, so any income earned from it is 'out of your domain'. See HMRC’s Savings and Investment Manual at SAIM2430. However, you need to be able to show HMRC, should they challenge you, that you took a loan from your child under regular commercial conditions, and that the interest that you paid to your child was similar to the interest that you would have paid to a regular commercial lender. You need very good paperwork to back up your position. In other words, you need to be able to show that the money that you added to your child's capital was interest that they had earned as regular investment income, and not in any way a gift from you.