House of Commons - Explanatory Note
House of Commons
Session 2003-04
Publications on the internet
Other Bills before Parliament
Arrangement of Clauses (Contents)

Child Trust Funds Bill







1.     These explanatory notes relate to the Child Trust Funds Bill as introduced in the House of Commons on 27th November 2003. They have been prepared by the Inland Revenue in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require an explanation or comment, none is given.


3.     In the 2003 Budget, 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 (Official Report, volume 403, column 286, 9 April 2003). The Child Trust Fund is a key part of the Government's savings strategy which aims to ensure that a range of savings products is available to suit people at all stages of their lives.

4.     The Government has conducted two formal 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. In "Delivering Saving and Assets" in November 2001 the Government set out more specific proposals for delivering the Child Trust Fund. Both of these papers are available in the libraries of the House and on the Treasury website. Since then the Government has worked with financial providers and other interested parties to develop the details of the Child Trust Fund further. 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.

5.     The policy objectives of the Child Trust Fund are to:

  • help people understand the benefits of saving and investing;

[Bill 1-EN]     53/3

  • 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; and

  • build on financial education to help people make better financial choices throughout their lives.

6.     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.

7.     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 on providers will be set out in regulations). There are additional provisions covering such matters as tax relief, the use of information and arrangements for appeals.

8.     There will be administrative links between the Child Trust Fund and child benefit and child tax credit. Eligibility for the initial contribution will be 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 Child Trust Fund. 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.

9.     Child benefit cannot be claimed for children who are being looked after by a local authority. This Bill 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. The Inland Revenue will then ensure that accounts are opened for those children in respect of whom no child benefit award has been made. Children in care will automatically receive an amount representing the initial and additional contributions when accounts are opened in these circumstances.


Clause 1: Child Trust Funds

10.     Subsection (1) refers to the Bill being about child trust funds and "related matters" because the Bill also deals with payments to the personal representatives of otherwise eligible children who die before Government contributions are credited to their accounts.

11. Subsection (2) defines a Child Trust Fund (CTF) as an account opened for an eligible child which satisfies the requirements of this Bill (and regulations made under it) and has been opened in accordance with this Bill.

12.     Subsection (3) provides for matters dealt with by the Bill 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.

Clause 2: Eligible children

13.     Subsection (1) 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. This means that it will be essential to claim child benefit for a child if that child is to qualify for a CTF account. There is one exception to this rule which is covered in subsection (1)(b). Child benefit cannot be claimed for children who are in the care of 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.

14.     Subsection (3) 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, are eligible for child trust funds. Under European Union Regulation 1408/71 which governs the co-ordination of social security for migrant workers within the EU, child benefit is normally payable by the country in which the parent works. Given the geographic position of the UK, the most common situation is where a family lives in Northern Ireland and the only working parent works in the Republic of Ireland. In these circumstances child benefit is payable by the Republic of Ireland under Regulation 1408/71. This subsection ensures that otherwise eligible children in these circumstances will be entitled to a CTF account.

15.     Subsection (4) provides that where a person is only entitled to child benefit because of EU legislation the child will not be entitled to a CTF account. Under European Union Regulation 1408/71UK child benefit can be payable in respect of children who are not living in the UK, for instance children of European Union nationals working in the UK where the child still lives in the country of origin. Children in these circumstances will not be eligible for a CTF account. If such a child moves to live in the UK, he or she will be eligible from the time of that move subject to child benefit continuing to be awarded. This rule will not affect the children of MoD families and other crown servants as they are entitled to child benefit when based overseas by virtue of regulation 30 of the Child Benefit (General) Regulations 2003 (S.I. 2003 No. 493)

16.     Subsection (5) 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.

17.     Subsection (6) 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.

18.     Subsection (7) 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.

Clause 3: Requirements to be satisfied

19.     This clause sets out the requirements to be met for accounts to qualify as CTF accounts. Subsection (1) provides for financial institutions (referred to as "account providers") to be approved by the Inland Revenue before they can offer CTF accounts. The details of this approval 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.

20.     Subsection (2) 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. The CTF account will be a "wrapper" in a similar way to the ISA, that is it can be wrapped around a variety of products such as cash, unit trusts or life insurance. Accounts which do not meet the requirements specified will not be CTF accounts.

21.     Subsection (3) 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. As set out in the Government's detailed proposals for the CTF, all providers will be required to offer the stakeholder CTF account which will include investment in equities. This will allow families to benefit from the potentially higher returns from equities over a long period such as eighteen years. The risk of a loss in value associated with equities will be reduced by a requirement to spread the equity investment over a number of companies and to move the CTF investment from equities to safer assets such as cash or gilts as the maturity date approaches.

22.     Subsection (4) 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 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 they cannot be withdrawn;

  • no withdrawals will be allowed from the account except for administrative charges (these will be expressly permitted under regulations); and

  • the only person who will be entitled to give instructions to the account provider will be a "responsible person" (explained in subsection (6)).

23.     Subsection (6) defines a "responsible person" in relation to the eligible child. This does not include a local authority or a person under 18 (or 16 in Scotland). Although the account will be owned by the child, it can only be administered by an adult. This is because CTF accounts can include investments in equities and the law does not allow people under 18 (or 16 in Scotland) to enter into enforceable contracts to buy or sell equities. In Scotland a person between 16 and 18 will be entitled to administer their own CTF account. But they will still not be able to withdraw the money from the account until they turn 18.

     24.     Subsection (7) 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.

Clause 4: Inalienability

25.     Under subsection (1) any assignment of or charge on funds held in a CTF account will be void. Subsection (2) 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 deal with Scottish legal equivalents.

Clause 5: Opening by responsible person

     26.     Subsection (1) 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. Subsection (2) 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 clause 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 in local authority care will have CTF accounts opened under special arrangements (see clause 6).

27.     Subsection (3) provides that a responsible person (see paragraph 23) can apply to open a CTF account for the child named on the voucher by giving the voucher to an account provider, within a period to be set in regulations (beginning with the day on which the voucher is issued). The Government has proposed that that period be one year. The responsible person can choose the account provider and the type of account to be opened.

28.     Subsection (4) requires the provider, in accordance with regulations setting out the details of this procedure, to open a CTF account on receipt of the voucher and inform the Inland Revenue.

Clause 6: Opening by Inland Revenue

29.     Subsection (1) provides that for children to whom this section applies (defined at subsection (3)) the Inland Revenue has a duty to request a provider to open a CTF account of the type specified by the Inland Revenue. The account specified under this subsection will be the stakeholder CTF account (see paragraph 21).

30.     Subsection (2) ensures that the provider cannot refuse the application made under subsection (1). The proposals paper states that providers will not be obliged to offer accounts under this arrangement (described as Revenue-allocated accounts in the proposals paper). However, where providers decide to offer these accounts, they will not be entitled to refuse the request to open a particular account.

31.     Subsection (3) sets out the two groups of children to whom this clause applies. The first group consists of children who are entitled to a CTF account because of an award of child benefit, but who have not had a CTF account opened for them (see subsection (4)). The second group of children are those who are entitled to a CTF account by virtue of being in the care of a local authority.

32.     Subsection (4) sets out the circumstances in which the Inland Revenue will request providers to open accounts although a voucher has been issued: either the voucher has not been used within the period set in regulations made under clause 5(3)) (the proposal in the CTF paper is for this period to be one year); or 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 18 and not entitled to administer a CTF account. In Scotland this rule applies to parents under 16 (see paragraph 23).

33.     Subsection (5) provides that the Inland Revenue will not be liable as a result of the choice of account provider or type of account under this clause. 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 (see paragraph 21). Parents will have the option (under clause 7) to change the type of account or the provider at any time.

Clause 7: Transfers

34.     This clause 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.

Clause 8: Initial contribution by Inland Revenue

35.     Subsection (1) 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 the receipt of a voucher (clause 5(4)) or following a request from the Inland Revenue to open a CTF account (clause 6(2)). The amount of the initial contribution will be set in regulations. When CTF accounts are first available it 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 clause 9. Children in care will not qualify for an additional contribution under that clause, but their initial contribution will be set at an amount equal to £250 plus the additional contribution.

Clause 9: Supplementary contributions by Inland Revenue

36.     This clause 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 clause 8). Subsection (1) imposes a duty on the Inland Revenue to inform the provider with whom the child's CTF account is held that the child is entitled to the supplementary contribution. The Inland Revenue will have this information because eligibility is linked to child tax credit.

37.     Subsection (2) imposes a duty on the Inland Revenue to pay to the provider the amount set out in regulations following a claim. A claim is required because the CTF account may have been transferred from one CTF provider to another.

38.     Subsection (4) defines the children eligible for a supplementary contribution under this clause. These are children who have a CTF account, were first eligible for a CTF account because of a child benefit award and satisfy the condition set out in subsection (5) of this clause.

     39.     Subsection (5) 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.

40.     This qualification for the supplementary contribution will not work for all children in the transitional group born between 31 August 2002 and the date on which the Bill comes into force ("the appointed day"). There are two reasons for this. CTC was first introduced on 6 April 2003 so subsection (5) cannot be satisfied if the child benefit commencement date is before 6 April 2003. This is addressed in subsection (9). The second reason is that parents claiming some other benefits will not transfer to CTC until a process to do that is carried out during the tax year 2004-05. This is addressed in subsections (7) and (8).

41.     Subsection (7) provides for children in the transitional group to qualify for the supplementary contribution if the condition in subsection (8) is satisfied even though subsection (5) is not satisfied. Subsection (8) sets out how children in some families without a claim for CTC 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 income based job seeker's allowance.

42.     The effect of subsection (9) is that if child benefit is first paid for a child before 6 April 2003, whether the child is eligible for the supplementary contribution will be determined by entitlement to child tax credit in the 2003-4 financial year (instead of the date when child benefit is first paid). This will ensure that children born between 1 September 2002 and 5 April 2003 do not miss out on the supplementary contribution simply because CTC had not been introduced when their parents first claimed child benefit for them.

Clause 10: Further contributions by Inland Revenue

43.     This clause gives the Treasury power to make regulations requiring the payment of Government contributions to account providers for children holding CTF accounts. Subsection (1) provides for these children to be eligible children as defined in this Bill (or a description of those children specified in the regulations) and for the amount of the contribution to be set by regulations.

44.     Subsection (2) 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.

45.     Subsection (3) secures that the regulations must include provisions for informing account providers of the amounts due, for the account providers to claim the payments and to credit CTF accounts with the payments.

Clause 11: Recouping Inland Revenue contributions

46.     This clause gives the Treasury power to make regulations requiring persons of a description specified in the regulations to repay to the Inland Revenue sums paid into accounts by the Inland Revenue under clauses 8, 9 and 10. They will also be required to account for any income and gains arising on the sums requiring to be repaid.

Clause 12: Subscription limits

47.     This clause relates to contributions to a child's CTF account made by family, friends and others. Subsection (1) provides that only monetary payments will be accepted for CTF accounts. It will not, for instance, be possible to make a deposit in the form of shares.

48.     Subsection (2) 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 Government has published its proposal that the limit for savings by the child, family and friends will be £1,200.

     49.     Subsection (3) defines the period of a year for annual contributions as the period from first opening a CTF account to the child's next birthday and each subsequent period of twelve months.

Clause 13: Relief from income tax and capital gains tax

50.     Subsection (1) provides for regulations to be made giving relief from income tax and capital gains tax for income and gains arising on investments held in CTF accounts. In addition, as proposed in the CTF paper, regulations will be made under this subsection disapplying the income tax settlements legislation for CTF accounts. This legislation prevents parents from gaining a tax advantage by placing money in their children's accounts. Where gifts from a parent give rise to income of more than £100 in a year, the parent is taxed on all that income at his or her own income tax rate. However, contributions to CTF accounts will not count as such gifts.

51.     Subsection (2) makes further provision in relation to capital gains tax. Paragraph (a) permits provision to be made in the regulations for capital losses arising on the disposal of investments held in CTF accounts to be disregarded for capital gains tax purposes. This means that such losses will not be deductible from any capital gains outside the CTF. Paragraph (b) allows the regulations to make provision relating to investments held within a CTF, including provision for them to be treated separately from any investments of the same kind (such as shares of the same class in the same company) held by the child in question outside the CTF. In particular, this will enable the identification rules which determine which shares are disposed of on a part-disposal of a holding of shares, to apply separately to shares held by the child within a CTF and to shares the child holds outside the CTF.

52.     Subsection (4) allows the regulations to include provision for appropriate restitution to be made to the Inland Revenue in circumstances prescribed by the regulations. This will include cases where tax relief has to be repaid because it was given where it was not due.

53.     Under subsection (5) regulations can be made modifying income tax or capital gains tax legislation in relation to CTF accounts.

contents continue
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries index

© Parliamentary copyright 2003
Prepared: 27 November 2003