Child Trust Fund (CTF) tax advantages?

Wibble

I'm looking at opening a Child Trust Fund with my government voucher, but am also trying to think whether to start adding regularly to it or to a separate investment.

What I want to know is how much of a tax benefit is it to save within a CTF compared to me saving into my own investment?

I know that in a CTF you save tax on income or capital gains, and I see how that would save tax if I was putting the money in a savings account where interest would be paid gross.

But, I don't see how it saves anything if I put money into accumulator funds. In that case I'd not be saving on income as none's paid - that value of the funds (hopefully!) just increases. I do see that there's potentially capital gains that could be saved when selling, but that would probably be in 18 years time and could be avoided by selling over a few years and/or using the capital gains allowance of mine, my wife's and our child's.

The main problem I see with a CTF is that it belongs to the child. Now, we all hope that ours will grow up to be financially astute and think using the money to pay for University or something is what they want to do, but you never know. They could decide to blow it all on a big holiday, spend it all in the first year at university, get in with the wrong crowd and fritter it away, etc. Whereas if we maintained control of the money we can ensure it's used for the intended purpose.

So what I'm really trying to work out is how big a tax advantage is it putting the money in the child's name in a CTF. If it turns out to be a lot then it could be worth doing and trusting that we can instil some financial sense in time! If it's more marginal, then I'd be more inclined to keep control of it.

I see a lot saying that there are tax advantages to the CTF, but I just don't see how they actually apply when investing in accumulator funds - so hopefully somebody can let me know if there are taxes we'd save that I don't know about.

I can see that if we put in the full £1,200 a year for 18 years then when we came to sell there could be a decent capital gains bill. But they ought to be fairly easily avoided if planned for.

Anyway - anyone know what actual, tangible tax advantages there are to CTF fund investments compared to keeping them in my own name?

Milarky

I do know that the interest (on a cash CTF) is tax free - just like an ISA. And when the account matures it retains the status of a cash ISA.

CTFs are also transferrable. And the question is - are they transferrable between 'types'? If they were then the advantage of an equity-CTF over a non CTF route is that the proceeds should be 'cash-ISAable' - which in the case of an ordinary S&S ISA they aren't.

[Can anyone confirm this option exists with CTFs please?]

Wibble

Hi,

Yes, I know that a cash CTF would save tax on the interest in a cash savings account, but as I'd be investing in accumulator funds (that don't pay an income) I'd not have any income to be taxed so a tax-free wrapper wouldn't be an issue.

The investment would primarily be for university expenses so in this case converting it into an ISA at the end wouldn't be too important as it'd soon be spent.

What I really want to know is what tangible tax advantages there are for a non-cash CTF, where the money's invested in accumulator funds, rather than just the woolly explanations I usually see that just say there are tax advantages without actually explaining what they're actually worth in non-cash CTFs.

Of course, we could do a half and half approach, putting a proportion into the CTF and keeping the rest in our own investments. That way any possible tax problems that might occur with a big investment in our names (e.g. going over our CGT allowance) is lessened, and if they did blow all the money in the CTF then we still have some left in our names.

dunstonh

For investment CTFs, there is no real tax advantage over unit trusts on equity funds. However, fixed interest funds can claim the tax back (just like ISAs). If you plan to use equity funds rather than fixed interest funds, you may prefer to use unit trusts or investment trusts as that gives you a bit more control over when they get the money.

CGT is the only issue of real concern but you would need to be making large contributions for that to be an issue (or you make use of your CGT allowance every year).

The term "accumulator" funds is not generic so I assume you are looking at some providers marketing material when you say that.

Wibble

Hi Dunstonh,

Thanks - I did wonder if there was any real tax advantage in it and it's good to have another opinion that there isn't necessarily when using unit trusts.

I understand that getting around the CGT does depend on us having our CGT allowance available and not used in our other investments, but I don't see that being a problem.

By 'accumulator', I think 'accumulation' is what I really mean - you often get two types of unit trust - an income or an accumulation type. The former pays you an income from the dividends they receive, the latter doesn't as it reinvests the dividends.

Milarky

Is an equity CTF (because it can be switched between cash and investments -and back again- within the CTF wrapper) 'cash-ISAable' at age 18 please (c/f 'regular' ISAs)?

Thanks

baby_boomer

A cash CTF is a way for parents to give cash to their children with no tax issues.

You can find cheaper investment schemes outside a CTF.

cheerfulcat

Wibble wrote: »

By 'accumulator', I think 'accumulation' is what I really mean - you often get two types of unit trust - an income or an accumulation type. The former pays you an income from the dividends they receive, the latter doesn't as it reinvests the dividends.

Wibble, they may be re-invested but the dividends are still treated for tax purposes as having been paid, and should be declared.

Wibble

cheerfulcat wrote: »

Wibble, they may be re-invested but the dividends are still treated for tax purposes as having been paid, and should be declared.

Hi Cheerfulcat,

I didn't know that, as the funds I have are held in a SIPP and so not taxed that way. Well, I know Gordon Brown raided the pensions and taxed that income to some degree at source - a great stealth tax that people don't notice until decades later when they retire with less income!

Anyway - if that's the case then it would make a CTF with income rather than accumulation funds more attractive as depending on the value of dividends you get it could add up to a fair bit over time.

dunstonh

Well, I know Gordon Brown raided the pensions and taxed that income to some degree at source

It wasnt just pensions, although you tend to find that the media home in on pensions whenever something investment related is affected. Every tax wrapper and unwrapped investments were affected by the change in some way.

Anyway - if that's the case then it would make a CTF with income rather than accumulation funds more attractive as depending on the value of dividends you get it could add up to a fair bit over time.

It makes virtually no difference whether you select accumulation units or income units. The difference tends to be around 0.01% a year between the two versions and will swing between better or worse depending on when the income is reinvested and what unit price it gets vs the increase in the unit price on the accumaltion units and how much the equalisation is.

Milarky

Can anyone answer my question about whether CTF proceeds are ISA-able regardless of the type of CTF used - and therefore whether an enquity CTF - into cash ISA route (for example) is allowed?

Ta