Savings trap could land households nasty HMRC tax bill | Personal Finance | Finance
A simple mistake could mean losing valuable tax benefits (Image: Getty)
British parents are being urged to check a little-known HMRC rule before making savings decisions for their children, as a simple mistake could mean losing valuable tax benefits. Experts say many families could be affected without even realising, particularly those with children born between September 1, 2002 and January 2, 2011.
The issue centres on Child Trust Funds, which were introduced for children born between September 1, 2002 and January 2, 2011. While many parents opened the tax-free accounts themselves, around 1.7 million were created automatically by HMRC when vouchers were not used. Years later, many of those accounts have been forgotten about.
That could become a problem for parents who later open a Junior ISA without first checking whether a Child Trust Fund already exists.
HMRC rules do not allow a child to have both a Child Trust Fund and a Junior ISA at the same time. If a Junior ISA is opened when a Child Trust Fund already exists, the Junior ISA must be closed.
Alice Haine, head of personal finance at Hargreaves Lansdown, said: “Unfortunately, HMRC does not allow you to have both a Child Trust Fund and a Junior ISA. The JISA is essentially the modern successor, so if you do accidentally end up with both, it’s the JISA that must be voided.
“That can mean selling investments or withdrawing cash and losing the tax-free wrapper, which is a real blow if you’ve been paying in for years.
“Around 6.3 million children were given a CTF between 2002 and 2011 and plenty have been forgotten about, so if you’re about to open a JISA, it’s worth a two-minute check for an old CTF first using the government’s free finder tool.”
Child Trust Funds were replaced by Junior ISAs in 2011 (Image: Getty)
While some parents may worry about being landed with a tax bill, HMRC said this is unlikely in most cases.
An HMRC spokesperson said: “In cases where a Junior ISA has been opened and the child also has a Child Trust Fund, the Junior ISA simply needs to be closed, with the funds placed in a non-ISA savings account in the name of the child.
“In the overwhelming majority of cases we would not expect any tax to be due on any interest earned in the Junior ISA.”
Child Trust Funds were replaced by Junior ISAs in 2011, allowing parents to save up to the annual Junior ISA allowance tax-free until a child turns 18.
Anyone unsure whether a Child Trust Fund exists can use the Government’s free online tracing service to find it.
On average, unclaimed Child Trust Funds are worth around £2,200, while around two-thirds of the 6.3 million people who received one are now aged 18 or over and able to access their savings.
Families who know which provider holds the account can contact it directly, while anyone searching is advised to use the Government’s free service rather than third-party websites, which may charge a fee for something that can be done at no cost.
