Over a million Child Trust Funds (CTF) worth an average £2000 each are dormant and forgotten, awaiting parents to track them down using an HMRC tool, it was revealed recently.
But for many families, the savings plan set up by the Labour government in 2005 has been a benefit and could make a huge difference to a young adult’s life.
The purpose of the CTF was to encourage long-term and regular savings into a tax-free account that the child can access at age 18. New parents were handed a £250 voucher to kick-start the fund (up to £500 for parents on low income) and could add to it each year choosing between a cash or investment account. For some children, there was a second government contribution at age seven. Children were eligible if born after 1 September 2002 and before 2 January 2011 when the CTF was replaced by the Junior ISA. The income and investment growth in the CTF are entirely tax-free and do not affect entitlement to benefits or tax credits.
The annual allowance for contributions was £4,260 from 6 April 2018. So as far as inheritance tax is concerned, top-ups from parents or other family members can probably be covered by a combination of the contributors’ annual £3,000 gifting allowances and the exemption for regular gifts from surplus income.
Although the child has to wait until they are 18 to access the fund, they can choose to take over control of the account from their parents or guardians once they are 16.
Some of the larger CTFs will be in the tens of thousands of pounds and could fund a house deposit, higher education, or a business start-up. However, powerless parents may worry that their 18-year-old will fritter away the fund at their first taste of freedom.
The best advice is to start family conversations about the CTF, its value, and the options available, before the child reaches 16 and certainly before they turn 18. Guidance and proper professional advice can help them develop financial awareness and make sensible decisions.
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Whether or not the advice falls on deaf ears, the process itself gives a valuable opportunity to observe and evaluate how a young person manages. It can help the older generation make more informed decisions about how they might pass on their own wealth, perhaps by way of lifetime gifts or ultimately an inheritance.
If parents or other relatives are satisfied that the child is financially mature enough to handle what might be a significant amount, they can keep the structure of a gift or inheritance relatively simple and pass it to the child outright. It is then in the child’s ownership and control, though it may be looked after by others in a ‘bare trust’ until such time as the child calls for it.
If however there is a concern (perhaps raised by observing how the child copes with their Child Trust Fund) that the child has yet to demonstrate financial responsibility or is perhaps vulnerable to third-party influences, parents can decide to wrap the assets in a trust for the child’s longer term benefit. Trustees of the parents’ choosing will then decide how to manage and invest the trust assets and determine the right time to distribute income or capital to the child.
Trusts can give flexibility and protection for many years but the tax consequences must be considered carefully. Something that might be efficient for one tax may trigger another, so professional advice is needed.
Flexible, discretionary trusts in Wills are a great way for parents to leave their estates on death, allowing their trusted executors and trustees to take account of all the circumstances at the time before deciding how the estate can best benefit children and other beneficiaries. However parents who are uncomfortable with this high level of flexibility can opt for more certainty in the Wills and less responsibility and discretion for executors and trustees.
Even a Child Trust Fund with a relatively small amount set to go to a child at age 18 gives advisers the opportunity to have a conversation with the parents. It can cover their own broader estate planning and how they would like to provide and protect wealth for future generations.
Published: 18 September 2018
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