Using the Child Trust Fund you might already have

Child Trust Funds are a great way to help save for your children’s future in a tax efficient way. What’s more, you might already have one without realising! Financial Planner Ben Roger explains more.

When saving for your child’s future, it is important to know about the allowances HMRC has made available. In addition, an interesting timing quirk may allow you to boost your child’s tax free savings by almost £30,000 this tax year (2018/19).

I’m talking about the Child Trust Fund (CTF) or Junior ISA (JISA) which allow savings (up to £4,260 in either fund in 2018/19) to grow tax free. These funds can’t be accessed until the child turns 18 when the pot becomes a standard adult ISA in their name (what’s more is your child might already have one, but we’ll get to that later).

Interestingly, 16-year olds are also able to open an adult Cash ISA and benefit from the full £20,000 allowance (as of 2018/19). As such, 16 and 17 years olds could move £24,260 into a tax free wrapper in the current tax year by using both allowances available to their age bracket.

Track down a lost Child Trust Fund and triple your allowance

Sounds good, doesn’t it? Well, it gets better – your child might already have a CTF. 

CTFs are the predecessor to JISAs and were introduced for children born between 1 September 2002 and 2 January 2011 and the parents were eligible for child benefit at the time. An initial £250 voucher was given to parents to open the child’s account.

Interestingly even if the parents did nothing with the voucher, HMRC set up a CTF on the child’s behalf.

According to The Share Centre, nearly a million children in the UK have lost track of their CTF. But for children aged between 7 and 15, the CTF offers another valuable opportunity to enhance savings in a tax efficient way.

Your child can’t have a CTF and a JISA at the same time but since April 2015 you are able to transfer a CTF into a JISA.

The opportunity arises because, unlike the JISA and ISA allowances, the CTF allowance is aligned to your child’s birthday not the tax year. The CTF allowance is also independent of the JISA allowance.

Therefore, you can utilise both. Parents can fund the full £4,260 either side of the child’s birthday and then, following a transfer to a JISA, fund a further £4,260. This timing quirk means parents are able save £12,780 into a JISA in one tax year (according to the current allowances for the 2018/19 tax year).

Tying it all together

Here is an example of how this might work, assuming the child turns 16 on 02/09/2018;

This provides you with a unique opportunity to utilise multiple allowances and move significant sums into a tax free wrapper within a short period of time.

However, everyone’s circumstances are different and since tax can still be a difficult area to manage, speak to your financial planner to learn about how such allowances could help you and your family.

The information provided is based on our understanding of current rules and regulations, which may change. The impact of any tax changes will depend on individual circumstances.The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not financial advice and should not be construed as such.