What you need to know about Child Trust Funds

  • Understand how Child Trust Funds work
  • Learn about ongoing contributions to CTFs
  • Know what happens if parents do not trust their children with the money at 16
What you need to know about Child Trust Funds

The Child Trust Fund was introduced in 2005 during the last Labour government and was set up for every child born between 1 September 2002 and 2 January 2011.

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 age 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.

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For some children, there was an additional government contribution at age seven.

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 by 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 seven 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 the 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 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 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 1 November 2011, £3,720 from 6 April 2013, £4,000 from 6 April 2014 and £4,260 from 6April 2018.  

Taking control

About 6m CTFs were set up and the first children to have been eligible in 2002 will be reaching their 16th birthdays from 1 September this year. 

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 their 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.  

However, knowing that funds can be withdrawn in two years’ time, it might be tricky to persuade a 16-year-old of the investment and tax benefits of this longer-term financial strategy.