Planning to help support Childcare Costs.

Charterbridge

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Planning to help support Childcare Costs.

The Family and Childcare Trust’s annual report suggests many parents pay more on childcare than on their average mortgage bill. With this in mind now may be a good opportunity to contact ‘older’ grandparents to discuss a range of financial planning opportunities to help fund for childcare costs for future grandchildren.

According to the Family and Childcare Trust’s annual report average fees for one child in part-time nursery and another in an after-school club are £7,549 per year; and parents with two young children needing full-time care would pay £11,700 a year.

The report compares the costs to the average annual UK mortgage payment which, according to figures from the Office for National Statistics (ONS), was estimated at £7,207 in 2012.

On these figures, the cost of childcare (for two children) is 62% higher than the average annual mortgage bill for a family home. Childcare costs have risen by 27% since 2009, while wages have broadly remained static.

Looking at these figures, it is not surprising that one-child families have increased by 5% over the last 16 years to 47%, while families with three or more children fell by 3% to 14% – according to a survey of 100,000 families carried out by the ONS.

Over the years many parents have been concerned about the financial wellbeing of their children and some may have put planning in place to help with these financial hurdles, for example for education funding or property purchase. The difficulty for many, of course, is that while the benefits of starting the saving process “early” are pretty much undeniable, surplus funds when your children are small are what most parents don’t have – maybe its grandparents who are the more likely targets to start, or at least contribute to, savings programmes.

The following is an overview of some of the arrangements available on the basis they are set up by grandparents.

Product Summary
Collectives held in bare trust
  • Income assessed on grandchild up to personal allowance
  • Capital gains assessed on child so up to £10,900 (increasing to £11,000 in 2014/15) tax free every year (regardless of settlor)
  • Grandchild has absolute right to capital at age 18
  • Immediate PET for IHT
  • Grandparent can be trustee along with parents if required
Collectives held in discretionary trust
  • Greater control and flexibility over when and who benefits
  • Income assessed on trustees (“tax-free” up to £1,000 pa standard rate band) but taxed on grandchild if paid or applied for their benefit
  • Capital gains assessed on trustees at 28% – £5,450 pa (increasing to £5,500 in 2014/15) normally tax free
  • CLT for IHT – no tax due if within available nil rate band
Collectives held in a flexible interest in possession trust
  • Grandchild has right to income so assessed on grandchild up to personal allowance
  • Trustees have control over who gets capital and when
  • Capital gains assessed on trustees at 28% – £5,450 pa (increasing to £5,500 in 2014/15) normally tax free
  • CLT for IHT – no tax due if within available nil rate band
Offshore/onshore bond held in bare trust
  • Chargeable event gains assessed on grandchild
  • Grandchild has absolute right to capital at age 18
  • Immediate PET for IHT
  • Grandparent as trustee along with parents if required.

 

Junior ISA
  • Up to £3,720 per annum (increasing to £3,840 in 2014/15)
  • Tax free income and gains
  • Set up in grandchild’s name
  • Automatically effectively available at age 18 as the Junior ISA “converts” to an “adult ISA”
  • Immediate PET for IHT – but exempt if within £3,000 annual IHT exemption

 

The above, while only an overview should still provide a good starting point for discussion when considering planning in this area.