Neil MacGillivray: The CTF and Junior ISA subscription limit quirk

With some children getting preferential access to bank of mum and/or dad into adulthood, advisers can play a part in helping parents, and even grandparents, make provision for this financially. With some careful planning around Child Trust Funds and Junior ISAs, Neil MacGillivray says clients would be barking mad to miss out on this government generosity…

Way back in 1978 the National Canine Defence League, now known as the Dogs Trust, came up with the memorable maxim: ‘A dog is for life not just for Christmas’. After a surge in dog ownership, many of the impulsive purchases were literally abandoned at the roadside.

Given the current Covid canine explosion, there are concerns history could be about to repeat itself. When taking into consideration financial planning, I do wonder if the same principle should be promoted when it comes to having children and not just pets.

For a couple, the average cost of bringing up a child in the UK to age 18 is estimated to be more than £152,000. For a single parent, unfortunately you can add a further £30,000 to the bill, according to the Child Poverty Action Group.

And, if you thought those sums were not eyewatering enough, the strain on bank of mum and/or dad doesn’t necessarily stop there. Three years at university is estimated to cost, on average, £56,000; at least £15,000 cash is required to help buy a first home valued at £200,000, and if you are a traditionalist with a daughter, you may be looking to spend around £30,000 on a wedding.

If these figures don’t drive your clients to consider a life of celibacy, then the need to plan for their little treasure’s future is not something that can be ignored. However, at a time when many parents have little spare cash, such thoughts may be well down their priority list. This is when grandparents could possibly step in.

Based on the calls I get, there are an increasing number of enquiries around grandparents wishing to make provision for their grandchildren during their lifetime. Previously, such provision was made through leaving legacies in wills, but there does seem to be a growing desire, whether as part of inheritance tax planning or, just in the hope they will live long enough to see their grandchildren benefit, to take action whilst they are still alive.

With this in mind, my attention was drawn to the recent HMRC announcement that there is £9bn languishing in child trust funds (CTFs), and I do mean languishing. Based on the limited information provided, HMRC state that over 80% of CTFs are worth less than £2,500. Further analysis of the figures suggests that the bulk of funds in this category are only just over £250, which in most cases probably represents just the subscription made by the Government.

So, it may be time to unwrap those forgotten CTFs and, due to a quirk in the rules, use them to kickstart a one-off saving opportunity.

The savings in a CTF can be transferred to a Junior ISA (JISA), with the CTF then being closed. However, as the subscription years for CTFs and JISAs differ, there is the opportunity to squeeze in a cheeky additional £9,000 contribution in the tax year of transfer. For a CTF the subscription year runs from the child’s birthday.

For example, if the child’s birthday is 1 October, the annual subscription needs to be made no later than on or before 30 September in the following year. The JISA subscription period runs in line with the normal tax year, and more importantly the savings transferred from a CTF don’t count towards the annual JISA subscription limit. This anomaly allows for up to three maximum £9,000 subscriptions to be made in the one tax year.

Therefore, in this example, maximum subscriptions to the CTF could be made on 31 July 2021, and again on 5 October 2021, with the CTF then transferred to a JISA. The third £9,000 contribution can then be made to the JISA on or before 5 April 2022, so that’s £27,000 tucked away in a tax-free wrapper for future use in adult life, which may provide some relief for parents.

For grandparents who are in the fortunate position to be able make such gifts for the benefit of their grandchildren, it could be argued they would be barking mad to miss out on government generosity in this instance.

Neil MacGillivray is head of technical support at James Hay