Children with incapacity: CTFs and JISAs in limbo

There is a growing issue with children’s investment accounts where the child can’t take over the account due to mental incapacity.

Under current regulations, a junior ISA (JISA) converts to an adult ISA when the child reaches the age of 18. At this point, the registered contact (i.e. parent or guardian) ceases to have control over the account, and the child takes over as the account holder.

There is a similar process for child trust funds (CTFs), whereby the registered contact steps aside, and the funds can be withdrawn or transferred to an adult ISA.

Where the now-adult child is unable to give instructions due to incapacity, both types of account can remain open and tax-free, but they’re left somewhat in limbo in terms of ongoing management. This is problematic if investments need to be bought or money withdrawn.

Challenges

The challenge from the provider’s perspective is that there is no avenue in the regulations for the registered contact to continue providing instructions: they have to come from the child. Furthermore, neither type of account allows withdrawals before 18 (unless the child dies or has a terminal illness).

As a result, the only suggestion the provider can offer is for the parent to make an application to the Court of Protection for a deputy order over the child’s affairs.

However, this is potentially time-consuming and costly (albeit there are some fee exemptions), so many parents will be put off by the prospect, particularly if the CTF or JISA is the child’s only investment account and is not a significant amount. The end result is that the parents can’t access the funds and the provider has an unmanaged account, which is a poor outcome all round.

Solutions

There may be a pragmatic way through, and we’ve seen the largest CTF provider in the UK, One Family, allow access to funds outside the standard framework. This is a positive move and will lead to good outcomes, but it’s reliant on providers being comfortable accepting the risk of being challenged further down the line by other family members or by HMRC if audited.

The ideal solution of course would be a regulatory one, and the Ministry of Justice launched a consultation in November 2021 about allowing access to small payments. It proposed measures to allow a single withdrawal in a six-month period up to a maximum of £2,500, the aim being to tide the parents over until they could apply for a deputy order.

This would be a step forward, but £2,500 isn’t much when you consider the annual CTF and JISA subscription limits were £3,600 as far back as 2011-12 and now sit at £9,000. Nor does it offer much more than a sticking plaster. The consultation response was due in July 2022, but this has been pushed back until autumn given it “exposed a number of issues that require further consideration”. I think there’s a risk we end up with an over-engineered process that only allows access to small sums.

However, there is also a potential HMRC solution. The published guidance for ISA providers currently allows a family member to apply for an adult ISA on behalf of a customer who lacks capacity even when there is no power of attorney or deputy order in place.

If HMRC could be persuaded to take a practical view and extend that current easement to JISA and CTF conversions, it wouldn’t be going far outside what it already allows and would help a growing number of customers out of a very difficult situation.