Parents saving money for their children are being warned of a HMRC rule that could leave them with an 'unexpected tax bill'. Under HMRC rules, a child cannot have both a Child Trust Fund (CTF) and a Junior ISA (JISA), and doubling up could result in tax charges.
Forgotten Child Trust Funds
Parents, or anyone bringing up a child, can put money aside to invest for their child's future. However, they are urged to check whether their child has a forgotten Child Trust Fund, as around 1.7 million accounts were set up automatically by HMRC.
Martin Lewis' Money Saving Expert (MSE) shared a warning on X, formerly Twitter, stating: "Under HMRC rules, children AREN'T allowed both a Child Trust Fund and Junior ISA – and doubling up could land you with an unexpected tax bill."
How CTFs were created
Most children born in the UK between September 1, 2002, and January 2, 2011, were eligible for up to £500 in tax-free savings from the Government. Parents were sent vouchers to open a CTF, but if they didn't, HMRC would do it on their behalf. By April 2012, around 6.1 million CTF accounts had been opened, of which 1.7 million were opened by HMRC, according to a 2023 report from the National Audit Office.
CTFs are now effectively 'dead' accounts, as no new ones can be opened. They were replaced by Junior ISAs, which allow tax-free savings or investments up to £9,000 per child per tax year in 2026/27. The money is locked away until the child turns 18.
Real-life case
One dad, who asked to remain anonymous, told MSE that a JISA he opened for his son years ago will need to be closed because of a CTF he wasn't aware of. He had around £55,000 in his JISA after saving for 15 years with investment firm Hargreaves Lansdown. This year, after seeing a social media post from Martin Lewis about reclaiming lost CTFs, he discovered his son had a CTF containing only £130. Its existence technically made the JISA invalid, causing an admin headache and a potential tax bill, though this hasn't been confirmed.
Hargreaves Lansdown says the dad now has two options: sell the existing JISA holdings and receive a refund, or move the assets into a 'Bare Trust', which avoids selling but removes the tax-free ISA wrapper. The dad told MSE: "[Hargreaves Lansdown] says that when the JISA was opened, we would have signed a declaration saying that our son had no CTF. Of course, we had no idea that he had a CTF, as we were not involved in the process of opening one! This is the most ridiculous case of the tail wagging the dog – losing tax-wrapper protection for £50,000 of investments all for the sake of £130 seems absurd."
A spokesperson for the firm told MSE: "We empathise with how frustrating this will be for [your reader] after investing for his son's future over a number of years. We're working with him to explain his options and will take instruction from HMRC should they suggest an alternate route forward."
Tax implications and advice
According to HMRC, you may have to pay tax, including Capital Gains Tax, if a JISA is closed because the child already has a CTF. This depends on the account's interest or investment gain, any other income the child received during the relevant tax years, and other specific circumstances. HMRC told MSE that it expects tax "won't be due in the vast majority of cases" where a JISA is invalid due to an overlooked CTF, but this can vary.
If you're unsure whether your child has a Trust Fund, you can check using a free tool on Gov.uk. MSE advises: "If you do discover a lost CTF, you can opt to transfer its balance into a JISA. Before opening the JISA, check if your chosen provider accepts transfers from CTFs (most do), then make sure you follow its official transfer process, which will include the CTF being closed, to avoid any issues later down the line." Note that a small number of children born before January 2011 may not have a CTF – for example, those who weren't UK citizens at the time. If that's the case, they can open a JISA as normal now.
