Maturing child trust funds will retain tax free status
16 Jan 2020
Holders of child trust fund accounts will be able to transfer their funds tax free when they start maturing in September, marking the scheme reaching 18 years
16 Jan 2020
At 18, account holders can do what they want with the money, either move it into a savings account, set up an ISA with any provider, split the money between different accounts, or withdraw the full amount as cash.
Official figures on the amount of money invested in child trust funds was last produced in 2012, when there was £4.89bn invested but the government no longer updates the figures. There are 6.3 million accounts, opened since launch, with estimates that one in six accounts are 'lost', with parents moving and losing track of the accounts.
Once the account matures and the holder reaches 18, the account will be theirs, and parents – registered contacts – will not be able to interfere with the account. Providers will only accept instructions from the account holder.
The government is consulting on the final details to ensure that child trust funds can be transferred into new ISA accounts without breaking the annual £20,000 subscription limit, irrespective of whether they are UK resident at the point of transfer. However, they will count towards the Lifetime ISA payment limit.
It will only be possible to make one-time transfer rather than taking small amounts out of the fund. Savers will have to issue a single set of instructions to the fund provider and once the funds are removed the account will be closed. It will not be possible for the account holder to instruct that some or all funds are retained in a matured child trust fund account and only some removed or transferred.
The rule changes make sure the investments remain tax advantaged in the fund, which is effectively sealed until the account holder notifies the provider that they want to transfer the funds.
Once a child trust fund reaches maturity, no further funds can be saved in the account and it has to be transferred to a different account to continue building up savings.
An estimated 800,000 child trust funds are set to mature each year and 6.3 million accounts have been opened. They were launched in 2002 during the Labour government under Gordon Brown’s chancellorship, giving children born on or after 1 September 2002 up to £500 in a savings starter account. The scheme was abolished by the coalition government in 2011 and replaced by Junior ISAs.
Providers will also have to send an account statement following the account holder’s 17th birthday, setting out the state of the account.
In the consultation feedback, fund providers said that there were also difficulties reaching account holders. Although this issue was not part of the consultation, the government recognised that this was an issue. HMRC now includes information about child trust fund accounts when they send 16 year olds their national insurance number, highlighting their existence.
At maturity, where no instructions have been received from the account holder on what they want to do with the investments in the child trust fund, the money will be held in a ‘protected account’ pending instruction.
Funds in the ‘protected account’ will retain their tax advantaged status, and the terms and conditions which applied before maturity.
The ‘protected account’ can be a ‘matured child trust fund account’ or a cash ISA or stocks and shares ISA, as offered by the original child trust fund provider.
Sarah Coles, personal finance analyst, Hargreaves Lansdown said: ‘These are very sensible plans, which should ensure child trust funds (CTFs) mature at the age of 18, settle down, and do the right thing. It makes it far easier for the young people who hold them to do the same thing.
‘We know this works because Junior ISAs roll over into adult ISAs automatically, and the vast majority of our clients with matured JISAs still have the money invested a year later. It’s a relief to see CTFs finally catching up with JISAs – in one area at least.
‘It’s also going to help protect those children whose parents have lost track of their CTF – which may well run into hundreds of thousands. Now that money will still be able to grow tax-free until it’s reunited with them.
‘But if your child has a CTF, this doesn’t mean you can afford to sit back and wait for maturity. Younger CTF holders still have years left in the product, and that time may be far better spent in a JISA. For almost five years you’ve been able to switch a CTF into a JISA, which can offer better rates on cash and lower charges on investments, so may well be a better place for your money.’
Non-UK residents will be able to transfer the funds to a UK ISA, but ‘it will not be possible to subscribe or make payments to that account until the account holder becomes UK resident and has completed the necessary ISA declarations as to residency,’ the government said.
There are approximately 70 approved child trust fund providers.
This technical consultation seeks views on draft regulations which will ensure that funds in maturing child trust fund accounts can retain their tax-advantaged status after maturity.
The rules will come into force from April 2020.