A Child Trust Fund (CTF) is a long-term tax-free savings account for children. All children eligible for a CTF account should now have one. See Junior ISAs and our 'Making the most of ISAs’ Key Guide
The Child Trust Fund was introduced in 2005 during the last Labour government, and was set up for every child born between 1st September 2002 and 2nd January 2011. The first CTFs matured in September 2020, when the oldest account holders turned 18. The last CTF will mature in 2029.
Its purpose was to encourage long term and regular savings into a tax free account, that the child could control from the age of 16 but not withdraw funds until aged 18.
New parents were handed a voucher of up to £250 to start off the fund (up to £500 for parents on low income) and could subsequently add to it each year, choosing between cash or an investment account. For some children, there was an additional government contribution at aged 7.
The income and investment growth in the CTF are not subject to income tax or capital gains tax, and its value does not affect entitlement to benefits or tax credits.
While top-ups to a CTF by a parent or other family member are treated as gifts for them for inheritance tax, it is likely that most, if not all, of the value potentially chargeable to inheritance tax in the event of death within 7 years will be covered by a combination of the contributors annual £3,000 gifting allowances, and the exemption for regular gifts from surplus income.
If a child with a CTF dies, it forms part of their estate for inheritance tax purposes and will be distributed under the intestacy rules (since a minor cannot make a valid Will). In most cases, the deceased child’s assets will not be sufficient to trigger an inheritance tax charge, and the parents will be entitled to them.
While the CTF scheme has since been replaced with the introduction of Junior ISAs, after the last coalition government came into power in 2011, annual payments can continue to be made to existing CTFs.
The annual allowance for contribution to a CTF started at £1,200 and increased to £3,600 from 1st November 2011, £3,720 from 6th April 2013, £4,000 from 6th April 2014, and £4,260 from 6th April 2018 and £9,000 in the current tax year.
About 6 million CTFs were set up and the first children eligible in 2002 will be reaching their 16th birthdays from September 2018. By the time they turn 18 from September 2020 their fund could be worth significantly more than £50,000 if invested well, and regularly contributed to over the past 18 years.
Although the child has to wait until they are 18 years old to take funds out of their CTF, they can choose to take over control of the account from the Parents or Guardians, once they are 16.
This means they can take on its management and decide whether to keep the account with the current provider or move it to a different one. One option is for the child to transfer their CTF to a Junior ISA (which is what parents of those under 16 have been able to do since April 2015), so that the account continues as an adult ISA after their 18th birthday.
If CTF’s have been properly funded, they will be a useful potential planning tool for University education and of course can also be transferred to a full ISA after the child’s 18th birthday, thereby giving them a very valuable financial start in life.
Our attached Key Guide offers an explanation of the interaction between CTFs and Junior ISAs and provides detailed information on alternate investments for children.