Tax and your children Child trust funds
Until 1 August 2010, all children born on or after 1 September 2002 received at least £250 from the government, and an additional £250 if their parents claimed child tax credit and had an income of less than £16,190 (2010-2011). These sums were reduced to £50 and £100 respectively, then ceased altogether at the end of 2010.
Paying in extra
Each year, extra money can be added by family and friends, and the £100 rule for parental gifts does not apply. After the end of 2010, no new CTFs have been permitted to be opened. Existing CTF accounts remain open however and can be used as a tax-efficient savings vehicle, as originally envisaged. From November 2011, a new Junior Isa has been available, into which you can deposit up to £3,720 a year (the same amount that you can pay into an existing CTF).
When the child turns 18
The money must remain invested in a child trust fund (CTF) account and can’t be touched until the child is 18 (although it can be transferred to another CTF). The child can then use the money any way they like, or transfer it into an individual savings account (ISA).
Types of child trust finds
There are three types of child crust funds – cash, share-based and stakeholder.
Cash CTFs are simply deposit accounts with bank and building societies, but the interest paid on the account is completely tax-free.
These are invested on the stock market, usually through investment funds like unit trusts.
However dividends received on most share-based CTFs (including stakeholder CTFs) are paid to the fund manager with 10% tax already deducted. This tax cannot be reclaimed by the fund manager.
No CTFs are liable for capital gains tax.
These are also invested into stocks and shares, but the money in the CTF will automatically be moved to less risky investments as your child nears 18.
Charges are capped so you can’t be charged more than 1.5% of the fund value each year in management charges, however you can find non-stakeholder accounts charging less than this so shop around.
There are also restrictions on where the money can be invested.
Another option: Buying a pension for your child
Contributing to a pension on behalf of your child is another tax-efficient saving option, but remember that your child can’t get at the money until they reach the minimum age for drawing a pension.
Up to £3,600 a year including tax relief can be paid into a pension for your child during the 2013-2014 tax year. Because 20% tax relief will be added to any contribution you make, you only have to pay £2,880 to get the maximum contribution paid into your child’s pension.