Parents are being urged to check a little-known HMRC rule before making savings decisions for their children, as a simple oversight could lead to losing valuable tax benefits. The warning centers on Child Trust Funds (CTFs), which were introduced for children born between September 1, 2002, and January 2, 2011.
While many parents opened these tax-free accounts themselves, around 1.7 million were created automatically by HMRC when vouchers were not used. Years later, many of these accounts have been forgotten about, potentially causing problems for parents who later open a Junior ISA without first checking whether a CTF already exists.
HMRC Rules Forbid Both Accounts
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 CTF already exists, the Junior ISA must be closed. This could mean selling investments or withdrawing cash, losing the tax-free wrapper that has been built up over years.
Alice Haine, head of personal finance at Hargreaves Lansdown, explained: “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.”
She added: “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.”
Millions of Forgotten Accounts
Around 6.3 million children were given a CTF between 2002 and 2011, and plenty have been forgotten about. Haine recommends a two-minute check using the government’s free finder tool before opening a JISA.
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.”
Tax Implications
The spokesperson added: “In the overwhelming majority of cases we would not expect any tax to be due on any interest earned in the Junior ISA.” However, the loss of the tax-free wrapper could still be significant for families who have been contributing regularly.
Parents are advised to act promptly if they suspect their child may have an existing CTF, to avoid the hassle and potential financial loss associated with closing a Junior ISA.
