The Government announced on 24 May 2010 the running down of Government contributions to the CTF as follows:-

(i)         There will be no contribution for a child who reaches age 7 after 31 July 2010.

(ii)        For children born between 2 August 2010 and 31 December 2010 the Government contribution is reduced from £250 to £50; and from £500 to £100 for low income families.

(iii)       From 1 January 2011 (this date was subsequently changed to 3 January 2011) no further Government contributions will be paid which will save the Government £½ billion a year.

This means that children born after 31 December 2010 will not benefit from a new CTF account.

However, for children born before 3 January 2011 who have a CTF account, family and friends of the child (anybody in fact), and the child himself (when older), could continue to make between them contributions of up to £1,200 in a year to the account.  From 1 November 2011 this limit has been raised to £3,600 to bring it in line with Junior ISA contributions (see below).  And the income tax parental settlement anti-avoidance rules continue to not apply to parental contributions so there is no risk of the parent(s) being taxed on income which accrues to the CTF account.

On 26 October 2010 the Government announced it was introducing a new tax-advantaged account for saving for children to replace the Child Trust Fund.  The account, known as a Junior ISA, was introduced on 1 November 2011. It should be noted that a Junior ISA will not be available for a child who has a Child Trust Fund account.

Introduction

Parliament published the Child Trust Funds Bill, together with Explanatory Notes on 27 November 2003.  The Child Trust Funds Act 2004 received Royal Assent on 13 May 2004.  The final regulations were laid on 27 May 2004 as the Child Trust Funds Regulations 2004.  The Child Trust Fund (CTF) came into operation from 6 April 2005, and benefits children born on or after 1 September 2002.  The CTF is administered by Her Majesty’s Revenue & Customs (HMRC).

Eligibility

All children born on or after 1 September 2002 and before 1 January 2011 are eligible for a CTF account if they are living in the UK and child benefit has been awarded for them, which means that to qualify for a CTF account child benefit must be claimed.  Special arrangements have been made for those children for whom child benefit cannot be claimed but who would otherwise be eligible, e.g. children in care.

Children who are not living in the UK, e.g. the children of EU nationals working in the UK, for whom child benefit is payable, are not eligible for a CTF account. Conversely, children living in the UK for whom child benefit is not payable under EU legislation are entitled to a CTF account.

Payments

The initial Government contribution is £250 for a child eligible for child benefit and £500 for a child not eligible for child benefit because he or she is in local authority care – Regulation 7.

(a)  Children been between 1 September 2002 and 5 April 2005

A higher initial amount was paid for those children born between 1 September 2002 and 5 April 2005 to compensate for the shorter period of time over which the fund will be invested.  The amount paid was as follows:

· Child born between 1 September 2002 and 5 April 2003 – £277

· Child born between 6 April 2003 and 5 April 2004 – £268

· Child born between 6 April 2004 and 5 April 2005 – £256

The higher initial special contribution for children in the care of the local authority in this transitional group was as follows:

· Child born between 1 September 2002 and 5 April 2003 – £554

· Child born between 6 April 2003 and 5 April 2004 – £536

· Child born between 6 April 2004 and 5 April 2005 – £512

Any payment due from HMRC but not made before the death of a child must still be paid.

Children in a family eligible for the full Child Tax Credit (currently families with a gross annual income of up to £16,190 for 2010/11) receive a supplementary initial payment of £250.

A higher supplementary payment was paid if the child was born before April 2005 as follows:

· Child born between 1 September 2002 and 5 April 2003 – £266

· Child born between 6 April 2003 and 5 April 2004 – £258

· Child born between 6 April 2004 and 5 April 2005 – £250

All eligible children born before 1 August 2010  received an extra payment of £250, at age 7, with an extra £250 being given if the family was eligible for the full Child Tax Credit.  No Government contribution is due for those attaining age 7 after 31 July 2010.

(b)  Children born after 5 April 2005

For children born on or after 6 April 2005, the Government will make an initial contribution of £250 to a Child Trust Fund (CTF) account.  A further supplementary contribution of £250 will be paid in respect of children for whom there is an entitlement to the full Child Tax Credit. For children born on or after 1 September 2002 and before 6 April 2005, if the Child Tax Credit condition was not satisfied but income support or income-based jobseeker’s allowance included an element of payment in respect of a child, a CTF payment was due.  This rule continues for children born on or after 6 April 2005.

(c)  Children born between 2 August 2010 and 31 December 2010

The £250 contribution is reduced to £50 and the £500 contribution to £100.

(d) Children born on or after 3 January 2011

No Government contribution so ineligible for a CTF account.

(e)  Special extra payments

Since 1 April 2007 the Treasury have been providing an extra £100 per year to every child who spends the year in care.

From April 2009 any child who is in receipt of Disability Living Allowance at any point in tax year 2009/10 and 2010/11 will receive £100 per year into their Child Trust Fund account from the Government.

Severely disabled children (ie. those receiving the Highest Rate of the Care Component of the Disabled Living Allowance) will receive £200 per year instead of £100.

Additional contributions

Regulation 9 permits additional subscriptions (which can include subscriptions made by the child). From 1 November 2011 up to £3,600 can be paid each year per child (£1,200 previous to this date). For this purpose, the first year runs from the date the account is opened to the child´s next birthday, and subsequent years run annually thereafter from that birthday. If the full £3,600 is not subscribed in a year, the unused amount cannot be carried forward for use in later years. Subscriptions can be maintained whilst the child is outside the UK, and there is no residence qualification for subscribers.

There will be no tax relief on these contributions and they will count as gifts for inheritance tax purposes.  The income tax parental settlement anti-avoidance rule will not apply – see under Taxation later.

The responsibility for monitoring the amount of contributions paid will lie with the CTF account provider.  It will be possible to establish feeder accounts, which could help eliminate any potential over-funding.

Vouchers

A voucher for the initial £250 payment available to all eligible children (which was increased for those born before April 2005) is sent to the person who claims child benefit (usually the parent).  The person who has parental responsibility (usually any parent or guardian, but from the age of 16 the child can manage the account themselves – see below) for the child can use the voucher to open an account, which is in the child’s name and administered by the person who has parental responsibility or the child from age 16.

The voucher is unique to the child and must be used to open the CTF account within 12 months of issue after which period it becomes invalid. HMRC will ensure that the initial £250 (increased as appropriate before 6 April 2005) is paid to the account. Further payments, e.g. the extra for children in families eligible for the full Child Tax Credit or disabled children, will be made automatically into the account by the Government.

If a voucher is not used within 12 months of issue to open an account, HMRC will open a stakeholder CTF account for the child – this is a low cost, risk-controlled equity account. A parent can assume responsibility for this account later if they so wish.

From 6 April 2009, instead of passing over the voucher to open an account it is possible to open an account over the telephone or via the internet by using some of the unique information on the voucher.

CTF and looked-after children

Looked-after children are those in the care of a local authority. For these children there is usually a person with parental responsibility who will be the person to manage a child’s account until the child has attained age 16. Looked-after children include, for example, an orphan with no legal guardian.

Local authorities sometimes have parental responsibility but are specifically excluded from managing CTF accounts under the Child Trust Funds Act.

In England, Northern Ireland and Wales the Official Solicitor manages a CTF account, and in Scotland the Accountant of Court, where a child is looked after and at least one of five conditions is satisfied.

The five conditions are broadly that:

(a) There is no person (apart from the local authority) with parental responsibility

(b) A child is living indefinitely away from home and will not have face-to-face contact with any parent having parental responsibility

(c) The local authority has been authorised to forbid contact between a child and the person with parental responsibility

(d) The person with parental responsibility is mentally incapable

(e) A child has been lost or abandoned and there is no prospect for the foreseeable future of the child being reunited with a parent having parental responsibility.

The local authority has a duty to identify such ‘qualifying’ looked-after children to HMRC, who will then advise the Official Solicitor or Accountant of Court, as appropriate.  The Official Solicitor or Accountant of Court will then become the registered contact for the CTF account, which means he will be able to manage the account.  When someone with parental responsibility becomes available (e.g. following adoption) that person will become the registered contact subject to certain safeguards.

The Official Solicitor or Accountant of Court, as appropriate, will send the child a copy of the annual statement, advise the child if the account is moved (giving reasons for the move) and notify the child shortly before age 16 that their duties as registered contact cease at age 16.

CTF providers

Any firm with the relevant FSA authorisation can apply to HMRC to enter the market.  Approval is based on the ISA approval basis as laid down in Regulation 14.

The draft regulations for the CTF required providers to offer a stakeholder account.  The final regulations allow firms to provide the CTF, where they are not in a position to offer a stakeholder account, by means of an alternative rule, where they provide details of a stakeholder account offered by another provider.  In such cases the provider has a duty to ensure that all potential applicants for a CTF are made aware of the availability of the stakeholder account and its features, and are put in a position to apply for that stakeholder account should they wish to do so.

Providers must accept all vouchers (unless the provider has reason to believe that the voucher has expired, may not be genuine, or that the applicant has give untrue information in his application).

Approval is only be given to a person who is:

· Authorised under the Financial Services and Markets Act 2000 (FSMA 2000) to undertake investment business, including authorised EEA persons;

· A building society or bank (as defined in section 840A(1)(b) ICTA 1988), and their EEA equivalents;

· A life assurance company which has permission under the FSMA 2000 to write such business and its EEA counterparts; or

· An incorporated or registered friendly society.

An EEA institution which falls within Regulation 14 above, but which does not carry on business in the UK through a branch or agency, must have a tax representative, who is either a company which has a business establishment in the UK or an individual who is resident in the UK, who will carry out the duties imposed on an account provider by the Regulations. Alternatively, other arrangements may be made with the HMRC.


Providers must demonstrate that they can satisfactorily operate the fortnightly claims and returns procedures set out in Regulation 30. Under Regulation 30, every fortnight a provider must inform HMRC of movements in accounts. A longer return period was allowed from 1 January 2005 (from when accounts could be opened) to 31 March 2005.

In respect of new accounts opened, the return acts as a claim for the Government contributions, which will be paid by HMRC fortnightly. When paying contributions, HMRC will also allocate stakeholder accounts as appropriate.

Under Regulation 32, an annual return has to be made within 60 days of the end of the tax year. This return requires comprehensive information on each account.  The return must be provided electronically.

By virtue of Regulation 31, sufficient records should be kept to evidence that the Regulations have been satisfied. In particular, a provider must be in a position to produce a copy of an annual statement to HMRC if requested.

Types of account

There are 2 types of account available:

1. A stakeholder account is one that satisfies the conditions in the Schedule to the Regulations. Any account opened by HMRC must be a stakeholder account.

2. A non-stakeholder account, which is any other account.

The stakeholder account

A stakeholder account is a low cost, risk-controlled equity account, which is simple and accessible and with capped charges.  The main features of a stakeholder account are as follows:

· The investments must have exposure to equities. For this purpose there is a restriction on a direct holding of shares in listed companies.  Such shares can be held indirectly through a collective investment scheme – a UCITS, a unit trust scheme, and an OEIC (but not investment trusts or with profits policies).

· The account provider must have due regard to diversification and suitability of account investments.

· Collectives and unit-linked insurance products must be single priced.

· From age 13, or the date the account is opened if later, until age 18 “lifestyling” applies unless opted out of by the registered contact i.e. the person having parental responsibility for the child who opens the account. Lifestyling means that there is a gradual shift towards less risky investments to preserve the value of cash available at age 18.

· Insurance contracts must be offered by UK or EEA authorised insurers.

· Cash held on deposit must accrue interest on a daily basis at a rate that is no lower than the Bank of England base rate less 1% per annum.  The rate of interest earned has to be increased within one month of any increase in the Bank of England base rate.

· A direct holding in securities (aside from securities in an investment trust) is a permitted investment provided the securities are gilt-edged securities or securities issued by or on behalf of a government of any EEA state, or securities, such as those issued by companies, which effectively guarantee to restrict any capital loss to not more than 20%.

· The minimum single subscription is £10 but a provider can set a lower minimum.

· Subscriptions must be allowed to be paid by:

o Cheque

o Direct debit

o Standing order

o Direct credit (other than standing order)

· The maximum annual management charge is 1½% of the value of the child’s rights or, if greater, 1½% of the value of the investments in the account.

· The only other charges which can be taken are those incurred in buying and selling investments, such as stamp duty, and the cost of securing for the registered contact rights as a shareholder, e.g. a copy of the annual report and accounts, if required.

Investment rules and permitted investments

Regulation 11 requires that investments must be purchased from cash in the account. Cash must be deposited with a deposit-taker or held in a deposit account or share account with a building society, which is designated as a CTF account. Investments must not be purchased from the child or child´s spouse.

Permitted investments are described at length in Regulation 12 and include shares listed anywhere on a recognised stock exchange, certain investment trusts, shares/units in most collectives authorised by the FSA, UCIT and non-UCIT retail schemes, cash deposits and cash.

Policies of life insurance, conventional or unit-linked, are permitted investments but not personal portfolio bonds, annuities, approved pension policies or capital redemption policies (not being policies of life insurance). After the first premium has been paid there must be no contractual obligation to pay further premiums. If regular premiums are paid they would therefore be a series of recurring single premiums. Any policy must only be on the life of the child and must prohibit any payment to the child on termination or part surrender whilst he or she is under age 18.

Special rules apply to life policies.

· No rights under the policy can be assigned except to a new account provider on a transfer or to the personal representatives of a deceased child.

· No loan can be made to the child or registered contact, or on the child or registered contact’s instructions, by or by an arrangement with the insurer.

If any of these conditions are breached and cannot be repaired (repair is not possible if the child is not an eligible child or holds more than one account) or has not been repaired, the policy must be terminated once the account provider becomes aware of the situation. During the period between the breach of conditions and termination of the policy, the policy will be treated as though it satisfied the conditions throughout that period so as to preserve its tax free status throughout, except where Regulation 38 applies. Regulation 38 imposes a tax charge on a life policy under the chargeable event rules where, due to a breach of conditions, the policy cannot be validly held in a CTF account.

Operation of an account

An account must be opened by a “responsible person”.  This is the person with parental responsibility for the child. Having opened an account, the responsible person is then known as the “registered contact”. The registered contact, of which there can only be one per account, gives instructions to the account provider.

There are 4 conditions to be satisfied before an account can be opened. These conditions are as follows, and set out in Regulation 5.

1. A voucher must be handed over to the provider or the account is opened over the telephone or via the internet using some of the unique information on the voucher (see below).

2. The applicant (which must be the child if they are aged 16 or over) must enter into an agreement with the account provider for the management of the account.  The management agreement must incorporate the application and declaration prescribed in Regulation 13. The declaration is that the applicant is aged over 16 and that they are either the responsible person for a child under 16 or that they are the child themselves being over 16.

3. If the application is not in writing, the responsible person must have otherwise agreed to the management of the account.

4. Where the management agreement is a distance contract the agreement must be an initial service agreement for the purposes of the Distance Marketing Directive and in any case where there is a right to cancel, that the cancellation period must have expired.

It is worth noting that since 6 April 2009 all applications processed by providers no longer need to comply with the first condition.  Instead of the parent handing over the voucher, CTF providers and distributors have been able to open accounts using essential information from the CTF voucher provided by the customer, such as the unique reference number, the child’s date of birth and the voucher expiry date.  This change allows, for example, telephone and internet application for CTF accounts to be made in a single paperless transaction without the need for the customer to post the voucher separately.

Regulation 6 deals with accounts opened by HMRC. Such an account must be a stakeholder account and is opened by HMRC when a voucher has ceased to be valid or there is no responsible person for the child.  Once the account has been opened HMRC will send a letter to the Child Benefit claimant informing them that an account has been opened and giving contact details for the provider.

HMRC keeps a list of providers who have agreed to offer HMRC accounts, and accounts are opened with such providers in rotation. If a provider offers more than one type of stakeholder account, these accounts are offered in rotation.

The general requirements for an account are set out in Regulation 8. For example, a child can have only one account, the account must be in the child’s name, at any one time only a single registered contact can give instructions to the account provider, any account transfers must take place within a “reasonable business period” not exceeding 30 days.


Originally management of the account was to lie with the ‘responsible person’ (e.g. parent or guardian) until the child reached 18 (16 in Scotland).  The final regulations mean that any child will manage their account from age 16.  It is, however, still the case that, except for meeting administrative charges, no withdrawals can be made from the account (including income and capital gains) until the child is aged 18.

As a consequence of the above, where the child is 16 or 17 and enters into a contract in connection with a CTF, the child will be treated as being aged 18 when the contract is entered.  The same rule will apply where the responsible person is aged 16 or 17, for example that person is the parent of a child who is eligible for a CTF.

At age 18, the account will cease to be a CTF account.  Until then, no withdrawals can be made from the account (including income and capital gains) except to meet administrative charges. Any assignment or charge on investments in a CTF account will be void, and the CTF account will be protected from the claims of creditors should the child be declared bankrupt.

Withdrawals from accounts