Between 2002 and 2011, parents could take advantage of Child Trust Funds (CTFs). You can now contribute up to £9,000 annually to your child’s 529 plan, or convert it to a junior ISA. Learn about the regulations, where to look for missing accounts, and whether or not a transfer into a JISA is the best option with this helpful read.
What is a Trust Fund for Children?
For children born between September 1, 2002, and January 2, 2011, CTFs, or Child Trust Funds, were a tax-free way to save money. The government provided vouchers of up to £500 (or £250) to families with low incomes to put into their children’s Child Trust Funds.
Since junior ISAs replaced Child Trust Funds in 2011, Child Trust Funds are no longer open to new account holders. Those who have a CTF can keep contributing as long as they have it. In theory, they can also switch to a new top rate whenever they like, just like regular savings accounts, though we haven’t come across any providers who actually allow this at the present time.
The five Child Trust Fund need-to-knows
1. There is an annual limit of £9,000 that can be contributed to a Child Trust Fund by either you or your child.
The primary goal of CTFs was not to provide parents with a windfall, but rather to inspire them to start saving early for their children’s futures. When combined with the government’s contribution (the “year” begins on the child’s birthday), contributions from parents, relatives, and friends can reach a maximum of £9,000.
Even though the spotlight has shifted to junior ISAs, the government has confirmed that there are no plans to change the tax-free status of CTF savings. To be strictly legal, the rules governing inheritance taxes must be followed. Nonetheless, unless it’s a sizable inheritance, this is probably not relevant.
2. Although interest is not taxed, its once-considered advantage no longer applies.
Most people shouldn’t bother putting money away in a Child Trust Fund because the current interest rates don’t make it competitive with other savings options for children.
The reason we say this is because a child’s taxable income is the same as an adult’s, so if they have no other source of income, they can earn up to £18,570 a year tax-free from savings (after subtracting the $12,570 personal income tax allowance, the $3,000 child tax credit, and the $1,000 personal savings allowance).
If, against all odds, they do have a real income, the personal savings allowance that went into effect in April 2016 allows them to earn up to £1,000 in savings interest annually tax-free (unless they become higher-rate taxpayers, in which case… WOW!)
Do CTFs offer any other tax breaks?
If the interest rate on the gift exceeds 100 pounds per year, then yes.
If a child receives more than £100 per year in interest from normal (non-Child Trust Fund or junior ISA) savings from either parent or stepparent (but not grandparents, aunts, uncles, etc.), that interest will be taxed at the parent’s tax rate.
Consequently, the £100 allowance is calculated on a “per parent” basis rather than a “per child” basis. The goal is to prevent parents from using their children’s tax-free allowance as a personal stipend.
When a child’s interest income exceeds £100 per year, the entire amount is subject to taxation at the parent’s rate. However, if the parent’s savings are under their personal savings allowance and the child’s savings do not push them over the limit, the money will be tax-free.
However, if the child’s savings exceed £100 and the parent’s personal savings allowance has already been exhausted, the excess savings will be subject to taxation.
The interest earned in a Child Trust Fund (or a junior ISA) is and remains completely tax-free, so doing so can provide significant tax benefits. Learn more about the kids’ tax and how it’s implemented by reading the article linked below.
3. Your child will not have access to the money until they reach the age of 18, but after that they can use it however they like.
A parent or guardian has the right to make all account decisions for a minor until the child turns 16, at which point the minor can take over account management if they so choose. With a Child Trust Fund, a child who is 18 or older can take charge of the account.
The money in a Child Trust Fund belongs to the child from the moment it is deposited, even if you retain control of the account.
Whatever your intentions were for the money, such as saving for a down payment on a house, they are no longer your responsibility once your child turns 18.
Extreme case: “Could I stop them if they wanted to buy drugs with it?” was a question put to Martin. No, that’s not the case.
Therefore, a Child Trust Fund carries a risk that a regular savings account does not (see our Don’t Pay Tuition Fees Upfront guide) when putting money aside for higher education. It may be more secure to save in your own name, provided the interest you earn doesn’t put you over your annual limit.
When my child turns 18, may he or she begin taking withdrawals?
Yes, with the sole exception of negative ideas. If a minor dies before turning 18, his or her parents or legal guardian will receive the inheritance. There’s an early payout option for kids with terminal illnesses, too.
Also Read: Find a Child Trust Fund
4. Accounts for children who have gone missing from their Child Trust Funds can be located.
A report by the charity Share Foundation estimates that one million Child Trust Funds have gone missing. A common cause of this is when a family relocates but forgets to notify their CTF provider of the change in address.
As luck would have it, HMRC provides a tool for determining which CTF provider you are currently using. Both adults and teenagers can use the resource. Follow this detailed tutorial:
Use the HMRC online calculator. Use a “Government Gateway ID” to enter the system. One is not required, and it is simple to make one.
Provide your (or your kid’s) personal information such as name, address, date of birth, phone number, and National Insurance number.
Within three weeks, you should receive a response from HMRC letting you know which service manages your account. If the government agency requires additional information, it will get in touch with you by phone or mail.
Get in touch with the CTF service, and it will help you recover your account.
You can do this for yourself if you are 16 or older (you can locate your CTF before you turn 18, but you won’t be able to withdraw the money until you turn 18). Find out where your child’s CTF is being held if they are younger than 16 years old.
If you don’t know their National Insurance number or Unique Reference Number (you can find them on any old paperwork related to Child Trust Funds), you’ll have to apply for them by mail.
The question is whether or not you can change the bank that manages your Child Trust Fund.
Although new CTFs cannot be established at this time, existing CTFs may be moved to a different service provider (or to a junior ISA provider). However, providers of savings CTFs that accept transfers in at the moment are extremely scarce, making this a problem.
Not that I’m denying their existence, though. First, let us know if you find a better fit and want to switch (though you may be able to get a better rate by switching to a junior ISA), and then, if you’re ready to make the move, read on for some guidance on how to make the switch and what to switch to.
Also Read: Child Trust Funds Overview