A trust is one alternative to consider for those just starting to plan for their child’s future. This is not a tax wrapper like a CTF or Junior Isa, but there is no limit on the amount that 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 that 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 per cent, 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 that 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 that can 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.

Bethany Joslyn is senior technical consultant at AJ Bell