Maturing accounts for young people that lack capacity

Child trust funds (CTFs) began maturing in September 2020 when the first account holders began turning 18. In the first year, 55,000 CTFs matured, and with the last CTFs due to mature in 2029, increasing numbers of young people are finding themselves needing to make decisions about their money, possibly for the first time.

Sadly, not all young people have the capacity to make decisions for themselves, with the Ministry of Justice estimating up to 126,000 young people may not have the capacity to access and manage their matured CTF when they turn 18. The maturing of CTFs has shone a stark light on this issue, but it also impacts other accounts for children, including Junior ISAs and bank accounts.

The Mental Capacity Act 2005 (MCA 2005) provides a framework for protecting vulnerable people who are unable to make some, or all, of their own decisions. However, these processes can be onerous, and if the right legal authorities haven’t been put in place their savings can be left in limbo and may be difficult to access when needed.

This article will examine how the rules for these accounts change when a child who has a CTF or Junior ISA and who lacks capacity becomes an adult, the legal mechanisms available to help your clients access these accounts on their children’s behalf, and key planning points to consider.

Transitioning to adulthood

The MCA 2005 applies to anyone aged 16 or over in the UK. The first of the five statutory principles of the MCA 2005 is that a person must be assumed to have capacity unless it is proved otherwise. Where possible, a person should be assisted in making a decision for themselves. Only where a person is incapable of making a decision should someone else make the decision for them, and this must always be done with the person’s best interests in mind.

Alongside this, until a child turns 18 their parents or legal guardians have parental responsibility for them. This, generally, permits them to make decisions for the child.

At 18 the child legally becomes an adult and parental responsibility falls away. To continue making decisions for them, your clients will need to obtain legal authority to do so.

This can be a contentious point where they’ve been managing their child’s accounts previously. CTFs and Junior ISAs are both managed by someone with parental responsibility – the ‘registered contact’ – until the child turns 18, so it seems natural to think that they could continue making decisions after that point if their child is unable to manage the account themselves. But for both accounts, the role of registered contact is only in place until the child turns 18. At that point, control of the account and all decisions regarding it automatically pass to the child.

Until someone can lawfully make a decision about the account, CTFs continue as matured accounts. This preserves the tax advantages of the wrapper, but there can be no withdrawals or further payments in, and no changes can be made to investments held. Junior ISAs automatically convert to an adult ISA (either cash or stocks and shares) on the day the child turns 18, but encounter the same problems.

As a result, there is no ongoing management of the savings and investments in these accounts. Vulnerable young people are at risk of not only being unable to access their savings when they need them, but also of having them eroded by poor market performance and fees. What’s more, if the value of these accounts is more than £6,000, their entitlement to Universal Credit could be reduced despite the difficulty accessing the funds.

Legal authority

There are two main legal authorities which allow a person to manage a matured CTF or ISA on a young person’s behalf: a property and affairs lasting power of attorney (LPA), and a deputy order.

A property and affairs LPA (or an enduring power of attorney in Northern Ireland) can be made by someone aged 18 or over and when they have capacity to do so. The ability to make a decision (or not) isn’t always constant and may fluctuate. An LPA can be entered into by someone with fluctuating mental capacity, so this may be an option in some circumstances.

An LPA must be registered with the Office of the Public Guardian at the outset for it to be valid. This normally costs £82 (£164 if also applying for a health and welfare LPA) but can be waived if the donor is receiving means-tested benefits, or reduced if they’re receiving Universal Credit or have earnings under £12,000. The LPA remains valid if the donor goes on to fully lose mental capacity.

The alternative is a deputy order. This can be applied for when there is no LPA in place and a person has already lost mental capacity. An application must be submitted to the Court of Protection where it will be assessed. The timescale for this process varies and has been known to take six months or more. In addition, there is an application fee of £371. Further fees may also be due if the Court unusually decides the application requires a hearing, plus a one-off assessment fee for new deputies and ongoing supervision fees. Although reductions and exemptions to some of these fees are available in the same way as fees for registering LPAs, not everyone will be eligible. The process for applying for a deputy order can therefore be costly and time-consuming.

Unfortunately, for most clients who find themselves in this situation, the deputy order is the only way forward.

For those living in Scotland, the Access to Funds scheme may also be used to close and transfer cash from a CTF or Junior ISA, but only where no investments are held, so this may be of limited use.

Recent review

The Government has recognised that this lack of access is a problem, and the Ministry of Justice consulted on proposals for a new Small Payments Scheme between November 2021 and January 2022. The hope was that a new scheme could be implemented to temporarily allow a suitable person to be able to withdraw payments of up to £2,500 without needing to obtain the form of legal authority required under the MCA 2005.

The Government’s response was published in February 2023. They decided not to go ahead with allowing these small payments to be made. Whilst 87% of respondents supported such a scheme, there was a lack of consensus about the safeguards needed to prevent abuse. The Government concluded the main issues lie with the court application process for obtaining the relevant legal authority, and a lack of awareness of the Mental Capacity Act. To combat this, the Government has committed to making it easier for digital applications to be made to the Court of Protection, and to work to raise awareness and understanding of existing rules.

It remains to be seen if the Government will return to this issue any time soon – having just looked at it in detail recently, you’d expect not – so clients will need to work within the current framework for now.

Planning considerations

It’s easy to see how clients could be put off by all this, particularly where they’ve been managing their child’s affairs up until they turned 18. Many will have assumed they’d be able to continue doing so past that point.

Where possible, start the conversation with your clients early. Inevitably, there will be some clients who come to you only shortly before their child turns 18, or even afterwards. But good planning in advance can help prepare your clients and smooth the transition. This will prevent delays accessing the funds, and ensures they can continue to be managed in the child’s best interests. Consider as well that, although complex and costly to arrange, a deputy order is useful for the long-term management of their finances.

A key feature of Junior ISAs is that access to the accounts is restricted, and withdrawals before age 18 can only be made where the child is terminally ill or has died. If the parents know from a young age that the child is unlikely to have capacity at 18, a Junior ISA may not be a suitable option.

A trust is one alternative to consider for those just starting to plan for their child’s future. This isn’t a tax wrapper like a CTF or Junior ISA, but there’s no limit on the amount which can be invested. Importantly, if they take on the role of trustees, the parents will retain control of the funds and can continue managing them, even after their child turns 18.

There are many ways to structure a trust which will impact the tax treatment of the funds, and the trust may need to register with HMRC’s Trust Registration Service.

A bare trust would allow the child’s personal tax allowances – including personal allowance, personal savings allowance, and the starting rate of savings of 0% – to be used towards any income or capital gains. Children are entitled to the same allowances as adults, meaning up to £18,570 of income plus £6,000 of capital gains could be received before any tax is due. Crucially, however, if a parent puts money into a bare trust account and the income exceeds £100 per parent, all income is taxed on the parent instead.

If a discretionary trust is set up for a vulnerable beneficiary, which can include either a child or adult with a mental health condition which means they cannot manage their own affairs, the trust may qualify for special tax treatment. To qualify, the trust funds must only be capable of being used for the benefit of the vulnerable beneficiary. If there are other beneficiaries, only the part which can only be used for the vulnerable beneficiary benefits from the tax advantages. This special treatment ensures the more advantageous tax rates of individuals apply, rather than the tax rates for trusts.