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Child Trust Funds Act 2004 [E/NI/S/W]

The Act sets up payments to children born from September 2002. The payment is initially set at 250 with an additional 250 to children in families on low incomes. Payment will be made into a Child Trust Fund.



Coverage: All four nations

Summary and background

In the Budget in 2003, the Chancellor announced the introduction of the Child Trust Fund, providing children born from September 2002 with an endowment of 250 together with an additional endowment of 250 for children in families on low incomes.

The Government conducted two consultations on the broad policy proposals of the Child Trust Fund. Saving and Assets for All published in April 2001 sought agreement on the principles behind the Child Trust Fund. Delivering Saving and Assets (November 2001) in which the Government set out more specific proposals for delivering the Child Trust Fund. In October 2003 the Government published its detailed proposals for the Child Trust Fund, setting out for the public and financial providers how this policy will be implemented.

The policy objectives of the Child Trust Fund are to:

  • Help people understand the benefits of saving and investing

  • Encourage parents and children to develop the saving habit and engage with financial institutions

  • Ensure that in future all children have a financial asset at the start of adult life

  • Build on financial education to help people make better financial choices throughout their lives
Under the Child Trust Fund, the Government will make payments to children which can only be invested in Child Trust Fund accounts. These accounts will be long-term savings and investment accounts. Families will be encouraged to contribute to these accounts but no withdrawals will be allowed until the child is 18. At that point only the 18 year old will be entitled to withdraw the money.

This legislation imposes a duty on the Inland Revenue to pay Government contributions to eligible children. It also sets out the qualifying conditions for eligibility for the Child Trust Fund and some of the requirements to be met by financial services providers who wish to offer Child Trust Fund accounts. Further details of the requirements for both providers and accounts will be set out in regulations. The Act contains additional provisions covering such matters as tax relief, the use of information and arrangements for appeals.

Eligibility for the initial contribution to a Child Trust Fund account is based on an award of child benefit for a child living in the UK (with the exception of children in care for whom special arrangements will be made). There will be no need for parents to claim the initial contribution. A payment will be made automatically following the award of child benefit (where the child lives in the UK). Children will be eligible for the additional contribution if they are part of a family claiming child tax credit with a household income below the income threshold for child tax credit. Again, there will be no need to claim the additional contribution. The Inland Revenue will make the payment into the child's account once the child tax credit claim has been finalised.

Looked after children

Child benefit cannot be claimed for children who are being looked after by a local authority. The Act ensures that special arrangements are made so that these children do not miss out on the Child Trust Fund. Under these arrangements, local authorities will inform the Inland Revenue of eligible children who have gone into care and Inland Revenue will then ensure that accounts are opened for those children for whom no child benefit claim has been made. Children in care will automatically receive an amount representing the initial and additional contributions when accounts are opened in these circumstances.

Commentary

Section 1: Child Trust Funds

This section:
  • Refers to the Act being about child trust funds and related matters because the Act also deals with payments to the personal representatives of otherwise eligible children who die before Government contributions are credited to their accounts

  • Defines a Child Trust Fund (CTF) as an account opened for an eligible child which satisfies the requirements of the Act (and regulations made under it) and has been opened in accordance with the Act

  • Provides for the law relating to Child Trust Funds to be under the care and management of the Inland Revenue. This is a standard feature of Inland Revenue legislation and protects customers by giving the Inland Revenue flexibility to resolve potential problems where a strictly legal interpretation of the position might not be in the customer's interest, for example a child finding itself with no account because of an error
Section 2: Eligible children

This section:
  • Defines a child eligible for a CTF account as a child born after 31 August 2002 who is the subject of a child benefit award. There is one exception to this rule which is covered in subsection (1)(b). Child benefit cannot be claimed for children who are looked after by a local authority. The effect of subsection (1)(b) (together with subsection (2)) is to bring these children into eligibility for the CTF although child benefit cannot be claimed for them

  • Ensures that children who live in the UK, but in respect of whom child benefit is not payable by the UK because of EU legislation or an international agreement, are eligible for child trust funds

  • Provides that where a person is only entitled to child benefit because of EU legislation or an international agreement the child will not be entitled to a CTF account

  • Provides that a child who does not have a right of abode in the United Kingdom, is not entitled to reside in the United Kingdom under European legislation and is not settled in the United Kingdom (within the meaning of section 33(2A) of the Immigration Act 1971), is not an eligible child. A child is settled in the United Kingdom if he is ordinarily resident here and under immigration law is not subject to any restriction on the period for which he may remain

  • Provides that entitlement to child benefit under subsection (1)(a) is established once a decision has been taken to award child benefit under Chapter 2 of Part 1 of the Social Security Act 1998 (or Northern Ireland equivalent). This means that the decision to award child benefit is the point at which a child becomes eligible for a CTF account

  • Enables regulations to be made under which an earlier date would be substituted for 31 August 2002 in subsection (1). Such regulations would bring older children into eligibility for the CTF
Section 3: Requirements to be satisfied

This section sets out the requirements to be met for accounts to qualify as CTF accounts:
  • Financial institutions (referred to as account providers) must be approved by the Inland Revenue before they can offer CTF accounts. The details of this approvals process will be set out in regulations and will be based on the approvals process for Individual Savings Accounts (ISAs) with which financial institutions are already familiar

  • Provides that the only accounts which will qualify as CTF accounts will be accounts of the descriptions specified in regulations. Under these regulations providers will be able to offer a wide range of accounts to meet different needs

  • Provides that the regulations governing the approval of providers may require providers to offer certain types of CTF account as a condition of approval as CTF account providers. The regulations will require all providers to offer the stakeholder CTF account which will include investment in equities

  • Sets out the key requirements that CTF accounts will have to meet:
    • Accounts will be held in the child's name

    • That child will be the beneficial owner of the savings and investments in the account

    • Income and gains on investments in the account will themselves become investments in the account, and so cannot be withdrawn

    • No withdrawals will be allowed from the account except for providers' administrative charges (these will be expressly permitted under regulations)

    • The only person who will be entitled to give instructions to the account provider will be a person who has authority to manage the child trust fund

  • Defines who will be the person with authority to manage a child trust fund: namely, the child if the child is 16 or over; otherwise a responsible person. Where there is more than one responsible person, the responsible person as determined by the regulations will have that authority

  • Defines a responsible person in relation to a child under 16. This will be the person with parental responsibility but will not include a local authority looking after a child under 16. Although the account will be beneficially owned by the child from when it is first opened, the account can only be administered by an adult until the child is 16

  • Defines parental responsibility by reference to the Children Act 1989 and its Northern Irish and Scottish equivalents. The 1989 Act defines parental responsibility as all the rights, duties, powers, responsibilities and authority which by law a parent of a child has in relation to the child and his property

  • Provides that in circumstances prescribed by regulations the person who has authority to manage a CTF account for a child under 16 will be the Official Solicitor or the Accountant of Court

  • Ensures that the Official Solicitor or Accountant of Court will have appropriate powers to manage a child's CTF account

  • Ensures that contracts made by 16 and 17 year olds in connection with a child trust fund have the same effect as contracts made by those aged 18 or over
Section 4: Inalienability

This section ensures that any assignment of or charge on funds held in a CTF account will be void and secures that where a child is made bankrupt it will not be possible for the creditors to gain access to the child's CTF account. The other subsections in this section deal with Scottish legal equivalents.

Section 5: Opening by responsible person

This section:
  • Requires the Inland Revenue, where a child is entitled to a CTF account by reason of a child benefit award, to issue a voucher in the form prescribed by regulations

  • Requires the Inland Revenue to issue that voucher to the person who is entitled to child benefit for that eligible child. Where the child is eligible by virtue of section 2(3) (living in the UK but with a parent working in another EU country, see paragraph 14) the voucher will be issued to a responsible person for that child. This voucher will be in the amount of the initial contribution to be paid to all eligible children: the Government has announced that this will be 250. It will be issued automatically following the award of child benefit. Parents will not be required to make a separate claim for the CTF. Children looked after by local authorities will have CTF accounts opened under special arrangements

  • Provides that the child, if over 16, otherwise a responsible person, can apply to open a CTF account for the child named on the voucher. The person opening the account can choose the account provider and the type of account to be opened

  • Provides that the method of application, and the period within which the voucher is to be used, is as set out in the regulations

  • Requires the provider, in accordance with regulations setting out the details of this procedure, to open a CTF account when the application has been made and inform the Inland Revenue
Section 6: Opening by Inland Revenue

This section:
  • Sets out the two groups of children to whom this section applies. The first group consists of children who are entitled to a CTF account because of an award of child benefit where an application has not been made to open a CTF account within the prescribed period (see subsection (5) of this section). The second group of children are those who are entitled to a CTF account by virtue of being looked after by a local authority

  • Provides that for children to whom this section applies the Inland Revenue has a duty to request a provider to open a CTF account selected in accordance with the regulations. The account opened under this subsection will be the stakeholder CTF account

  • Sets out the circumstances in which the Inland Revenue will request providers to open accounts although a voucher has been issued: either an application has not been made within the period set in regulations; or the child is under 16 and the Inland Revenue is satisfied that there is no responsible person able to open an account for the child. This will usually be where the parents are under the age of 16 and not entitled to administer a CTF account

  • Provides that the Inland Revenue will not be liable as a result of the selection of account provider or type of account under this section. Account providers will be selected in rotation from a list of those willing to offer these accounts. The account opened at the request of the Inland Revenue will always be the stakeholder CTF account. Parents will have the option (under section 7) to change the type of account or the provider at any time
Section 7: Transfers

This section gives the Treasury power to make regulations allowing a responsible person to change the type of CTF account, e.g. from a cash to a stakeholder CTF account, and to move a CTF account from one provider to a different provider.

Section 8: Initial contribution by Inland Revenue

This section imposes a duty on the Inland Revenue to pay to a provider the amount of the initial Government contribution (following a claim by the provider) once the provider informs the Inland Revenue that a CTF account has been opened either following an application or following a request from the Inland Revenue to open a CTF account. When CTF accounts are first available the initial contribution will be 250 in relation to children who are eligible because of a child benefit award. Those children may qualify for an additional contribution of 250 under section 9. Children in care will not qualify for an additional contribution under that section, but their initial contribution will be set at an amount equal to 250 plus the additional contribution.

Section 9: Supplementary contributions by Inland Revenue

This section sets out the conditions for eligibility for the additional Government contribution for children in families on lower incomes. It applies only to children who are eligible by virtue of a child benefit award (children in care will receive a higher initial contribution under section 8):
  • Imposes a duty on the Inland Revenue to pay to the provider the amount set out in regulations following a claim. The amount will be 250 with higher amounts for eligible children born before the launch of accounts in 2005. A claim is required because the CTF account may have been transferred from one CTF provider to another

  • Defines the children eligible for a supplementary contribution under this section. These are children who have a CTF account, were first eligible for a CTF account because of a child benefit award and satisfy the test set out in this section

  • Provides that there are two conditions for eligibility for the supplementary contribution. The first is that a person is entitled to child tax credit in respect of the child when child benefit is first paid for that child (described as the child benefit commencement date). The second is that either the household income does not exceed the income threshold for child tax credit or a member of the household was receiving a social security benefit prescribed under section 7(2) of the Tax Credits Act 2002, i.e. income support or income-based job seekers' allowance.

    This qualification for the supplementary contribution will not work for all children in the transitional group born between 31 August 2002 and 6 April 2005. There are two reasons for this. Because child tax credit was first introduced on 6 April 2003, it cannot be satisfied if the child benefit commencement date is before 6 April 2003. The second reason is that parents claiming some other benefits will not transfer to child tax credit until a process to do that is carried out during the tax year 2004-05

  • Provides for children in the transitional group to qualify for the supplementary contribution

  • Sets out how children in some families without a claim for child tax credit can qualify for the supplementary contribution. The child will have to be in a household in receipt of one of the following benefits when child benefit was first paid for that child: the child and young person's credit in working families' tax credit or disabled person's tax credit; or the children's allowance within income support or jobseeker's allowance (income based)
Section 10: Further contributions by Inland Revenue

This section:
  • Gives the Treasury power to make regulations requiring the payment of Government contributions to account providers for children holding CTF accounts. Defines the circumstances in which such contributions would be made as the children reaching an age specified in the regulations or any other condition specified in the regulations. The Government has published its proposal that the first of these payments will be when eligible children turn seven. The first payments will be due in 2009 and the amounts will be published nearer the time when the appropriate regulations will also be made

  • Secures that children held in legal custody but otherwise eligible will not be excluded from receiving payments made under this section
Section 12: Subscription limits

This section relates to contributions to a child's CTF account made by family, friends and others:
  • Provides that only monetary payments will be accepted for CTF accounts. It will not, for instance, be possible to transfer shares into a CTF account

  • Gives the Treasury power to make regulations setting the maximum amount of non-Government contributions that can be made to CTF accounts in any year. The limit for savings will initially be 1,200
Section 16: Information about children in care of authority

Child benefit legislation does not allow child benefit to be claimed for children in care but the Government wants to ensure that these children do not miss out on the CTF. This section gives the Treasury power to make regulations requiring authorities to provide both the information necessary to arrange for CTF accounts to be opened for children looked after by a local authority and any other information required for the administration of accounts, for example, for further Government contributions to be made.

Section 19: Payments after death of child

The Inland Revenue will have the power to make payments to the personal representatives of a child born after 31 August 2002 who has died before payments to which the child was entitled have been credited to a CTF account.

Section 20: Penalties

The Inland Revenue has power to impose a penalty of 300 on anyone who fraudulently applies to open, makes a withdrawal from or secures the opening by the Inland Revenue of a child trust fund.

The Inland Revenue is allowed to impose a penalty not greater than 3,000 on an account provider who makes a fraudulent or negligent claim under sections 8 or 9 or in connection with regulations under sections 10 or 13 and on any person who fraudulently or negligently provides incorrect information under section 15.

Penalties can be imposed on account providers who do not make a claim under section 8, 9 or 10 within the time set out in regulations and on any person who does not provide a document or information within the time set out in regulations under section 15. Subsection (4) sets this penalty at no more than 300 and no more than 60 for each day that the failure continues after the first penalty is imposed.

Section 21: Decisions, appeals, mitigation and recovery

This section sets out various procedural matters related to decisions, appeals and the mitigation and recovery of penalties. Under subsection (7) the Inland Revenue is given the power to mitigate penalties imposed under section 20.

Section 22: Rights of appeal

This section sets out the grounds under which account providers or responsible persons may appeal against decisions taken by the Inland Revenue.

Section 25: Northern Ireland

This Act will have effect throughout the United Kingdom. Under this section the Northern Ireland Act 1998 is amended to place the Child Trust Fund in the Schedule of excepted matters. This will ensure that the Child Trust Fund will always be dealt with by way of a UK-wide Act.

Commencement

A Treasury order (or orders) will be made setting out when this Act will come into force.

Further Information

  1. Child Trust Funds Act 2004
  2. Child Trust Funds Act 2004 - Explanatory Notes