Child trust funds: FAQs
Cash CTFs are the only truly tax-free saving accounts for kids
Who's eligible?
Any child born on or after 1 September 2002 is eligible. You won't be able to open a CTF for any child born before this date.
If you are a Crown servant stationed overseas, in the armed services for example, your child will also be eligible.
How do I claim it?
If you claim Child Benefit, a voucher for £250 will automatically be sent to you. You can use this to open a CTF account as soon as you receive it.
You will also receive an information pack setting out what you need to do next, including giving you a list of providers and distributors from which you have to choose.
Is there an annual limit?
Most providers will only let you pay in a maximum of £1,200 in any one year, determined by your child's birthday.
If the provider accidentally accepts more than £1,200 during this period, it will return the excess to the person who paid it in. Some providers may have a special feeder account to hold the money until your next contribution year which will coincide with your child's next birthday.
What tax rules apply?
Child trust funds have the same tax rules as Isas. This means that any interest on cash accounts is tax-free but investment funds in the share-based accounts (including stakeholders) are liable for income tax at 10% on any dividends received. Cash CTFs are therefore the only truly tax-free CTFs.
There is no liability to capital gains tax, and CTFs are exempt from the '£100 rule' which applies to most other types of children's savings and investments accounts. This rule says that, if interest received by a child from money or an investment given to them by a parent comes to £100 or more a year, it will be taxed as the parent's own income.
How much can my child expect to receive in 18 years' time?
This will depend on how much goes into the account, how you invest the money and what charges you have to pay.
The fees charged on accounts investing in shares could eat into your fund so much that you are as well off with a cash account – without the risk.
For example, if your share-based investment grows by 7% and you're charged 1.5%, you're left with a return of 5.5%. Yet providers of CTF cash accounts are currently offering interest of around 5-6%. Any investment fund with 1.5% charges is going to have to work pretty hard to better that by any significant amount.
Of course, the cash CTF rates may change, so you should review the account each year and switch if necessary to get the best deal.
What happens if I don't open an account?
Every voucher has an expiry date of one year after the voucher was issued. If you don't open an account before that expiry date, the Inland Revenue will open a stakeholder account for your child. You'll receive information about the account from the provider allocated.
Ethical investment products have extended to include CTFs as well
Can I choose an ethical account?
Some companies will be offering ethical investments. One example is Co-operative Insurance Society which has launched an ethical stakeholder CTF.
For this account, funds are invested in a unit trust that tracks the FTSE4Good UK Index. To be listed, companies must meet certain criteria including working towards reducing their environmental impact. It excludes tobacco producers and weapons manufacturers but does include oil and drugs companies.
All CTF providers must publicise their policy about social, ethical and environmental investments if they have one.
Will I receive statements?
Yes, you'll get an annual statement so you can keep an eye on how the account is performing.
What happens if I move overseas?
If you live in the UK and then move abroad after you've opened a CTF, you can keep the account and continue paying into it, although you won't receive the extra government top up if you are abroad when your child turns seven.
If you return to the UK having lived abroad, you'll get a voucher automatically when you claim Child Benefit.
What if I change my mind about the type of account I want?
You can change accounts whenever you like and there are no restrictions on the number of transfers you can make during the life of the CTF. This applies to internal transfers from, say, a cash CTF to a share-based one with the same provider, or externally to a new provider.
Transfers should take place within 30 days of your request. Although there are no specific fees for transferring, stamp duty and dealing charges may still apply with share-based accounts.
How can I invest for my child outside of a CTF?
Child trust fund vouchers can be paid only into CTF accounts. But if you want to invest money in shares, you can find better deals elsewhere.
Most of the funds offered as stakeholder and share-based CTFs are widely available with lower charges outside a CTF and can normally be taken out on behalf of a child. However, the minimum amount you have to invest may be higher than with a CTF.
You could get all the tax-free benefits of a CTF by opening the fund within a stocks and shares Isa (although Isas can't be opened on behalf of children so you would have to hold this in your own name and pass it to your child when he or she reaches 18 - or 16 if it’s a cash Isa).
Other money given to a child by parents, for example into a children's saving account, is tax free if it earns less than £100 in interest a year per parent. Money from family or friends is also tax-free if the interest it earns amounts to less than the annual limit.