Make sure you don’t get caught by child savings trap that could result in a nasty tax bill

PARENTS are being warned to make sure they don’t get caught out by a child savings trap that could land you with a nasty surprise tax bill. Under HMRC rules, you are not allowed to both have a Child Trust Fund and a Junior ISA (JISA). However, over a million families may not even realise that their child has a trust fund. Between 2002 and 2011, parents in the UK were issued with vouchers they could use to open one of the tax-free savings accounts. Sign up for the Money newsletter Thank you! But even if you didn’t open one yourself, HMRC would set one up for you – and an estimated 1.7million were opened automatically during this time. These were replaced with JISAs in 2011, which let you invest up to £9,000 a year tax-free for your child, with the cash locked away until they turn 18. If you have a JISA and a Child Trust Fund without realising, you will have to shut down your JISA, as highlighted by Money Saving Expert this week. What’s more, you may be hit with a tax bill, including Capital Gains Tax, which is charged on any profit you make when you sell or give away an asset that has increased in value. HMRC has said that tax won’t be owed in most cases where a JISA is invalid because of a surprise Child Trust Fund. 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. Most read in Money “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.” An HMRC spokesperson said: “In cases where a Junior ISA has been opened and the child also has 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.” How to track down your Child Trust Fund CHILD Trust Funds are tax-free savings accounts that were set up for children born between September 1, 2002 and January 2, 2011. On average, an unclaimed child trust fund is worth around £2,200. Around six million people received these tax-free savings accounts, with two thirds of this group now over 18 and able to withdraw their cash. To find your account visit gov.uk and enter your National Insurance number and date of birth. If you know which bank your account is with then you can contact it directly. Avoid using a third-party website to track down your account. These can charge fees to track down your cash but you can do this for free. Comment now