PLANNING FOR HIGHER EDUCATION COSTS
CHILDREN AND FINANCIAL PLANNING
Over recent years many parents and grandparents are becoming increasingly concerned at the future financial wellbeing of their children/grandchildren particularly if at age 18 they wish/intend to go to university.
Tuition costs of up to £9,000 per annum in England, combined with annual maintenance costs of annual £10,000 per annum, can mean that children face a total bill of up to £57,000 in today’s terms over a three-year university course.
Whilst student loans are available, many parents do not feel that leaving university with sizeable outstanding loans gives their children the best start in life.
So quite naturally those who have excess capital are choosing to make investments for the future benefit of their children/grandchildren. And because those children/grandchildren will generally be non-taxpayers, it will be important that such investments are tax efficient.
The starting point will be a Junior ISA (JISA). But this has two drawbacks: –
(1) Annual investment is limited to £3,720 and
(2) The child has complete access at age 18 and may not, of course, go on to university.
Second, an investment could be made using a bare trust to hold investments geared towards capital growth. The benefit here is that if investments are realised it will be possible to offset the child’s annual CGT exemption against any gains. However, the drawback is that once again the child can have access at age 18.
Third, the parents/grandparents could consider an investment in an offshore bond. Here investment growth largely accrues free of taxation. Also, if the bond is held in a bare trust, then any chargeable event gains will be assessed on the child beneficiary. Up until age 18, the ‘£100 parental settlement’ rule will apply to assess gains on the parent if the trust was created by the child’s parents and the child is unmarried, and not in a civil partnership.
Again a drawback in this situation is that the child will have full unrestricted access to the bond at age 18 – even if they don’t go to university.
For those parents/grandparents who are concerned about this, a discretionary trust should be used. Under such a trust the trustees can control when beneficiaries receive benefits under the trust. As regards the choice of investments to hold in the discretionary trust, thought should be given to collectives and offshore bonds.
The use of collectives will give the trustees the chance to use their annual CGT exemption of, currently, normally £5,450 per annum. However, they may then be involved in tax administration in terms of making tax returns in respect of any income generated on the collectives. This can apply even if income is accumulated. For this reason an offshore bond may be preferred as it is a non-income producing asset.
When the beneficiary (child) to whom benefits are notionally earmarked, attains age 18, the trustees can assign the bond to them provided an absolute irrevocable appointment of capital has been made. This will not itself trigger a chargeable event and the subsequent encashment of the bond by the beneficiary will mean that chargeable event gains are taxed on them. Hopefully these gains will fall within the beneficiary’s personal income tax allowance which is then likely to be well over £10,000.
This is all very well if the beneficiary is over age 18 but, what if a child/grandchild has a need for cash at an age under 18? On the basis that an assignment is not then possible (because the beneficiary is a minor), what the trustees could do is to make an absolute irrevocable appointment of segments comprised in the trust fund to the beneficiary. Those segments will then be held on bare trust for the beneficiary and the encashment of those segments will give rise to a chargeable event gain that will be taxed on the beneficiary.
However, if the chargeable event gain exceeds £100 (which is likely) and the settlor of the trust is a parent of the beneficiary in question, then chargeable event gains will be taxed on the parent.
In order to avoid this, the trustees could make 5% withdrawals and, having made an absolute appointment of capital, pay these out for the benefit of the beneficiary. Then when the child attains age 18, trust benefits could be appointed absolutely to the child. The bond could be fully encashed with all chargeable event gains – including those in respect of the withdrawals – being assessed on the child because the £100 rule no longer applies.
The earlier a parent/grandparent can put aside money for the future benefit of a child, the better. Tax efficiency can also improve those returns and, in this respect, a trust wrapper will be useful. The type of trust to use will depend on the investment that is being used and the needs, objectives and flexibility required by the investor. Offshore investments and trust wrappers can be complicated in the wrong hands, but as seen above they can bring simple and flexible benefits to complement your trusted financial planning arrangements.