Giving children and grandchildren the best start in life through private schooling and university education is expensive – but can be achieved with effective tax-efficient Trust planning.
Why is this so important?
- “…£53,366 is the average it costs to send a child to university…”
- “…annual private school fees average £13,194 in 2014..”]
- “..Private Education costs £286,000 on average…”
Trust for grandchildren’s School Fees
A grandparent (settlor) can set up a trust for their grandchildren. They can put up to £325,000 into this trust; this amount is equal to their unused inheritance tax (IHT) threshold which currently stands at £325,000. By doing this an individual reduces their own estate by £325,000 thereby potentially saving 40% tax on this amount (£130,000).
Provided the settlor survives seven years their IHT threshold in reinstated and therefore able to settle a further £325,000 upon trust after that 7-year period.
By creating a trust for grandchildren a grandparent is able to provide an income and/or capital that can supplement the grandchildren’s needs during their minority and adulthood also.
An added benefit of this type of trust is income tax savings. The trust can be used to make income distributions for the benefit and education of grandchildren. Income payments from the trust are paid net of income tax to grandchildren. The grandchild can thereafter reclaim part of all of the tax paid by the trustees via their own personal allowances. Where a trust has not been set up and assets remain within the settlor’s estate,
The settlor may currently be paying school fees net of income tax, which is not recoverable. Therefore, by placing the income producing assets into trust they are able to make the provision of school fees more tax efficient.
In addition to the above both grandparents may combine the amount they put in and therefore put up to £650,000 into trust. This can further reduce a family’s IHT liability and this can be done every seven years.
The settlor may also be trustee and control how funds are managed. The funds are generally placed with a qualified investment manager to provide sufficient income and capital growth for the beneficiaries.
The trust is extremely flexible and the type of trust wholly depends on what the client wishes to achieve.
Trust for Children’s University Fees
Effective tax planning and the use of a trust allow parents to provide for children’s university fees, which is an ever growing concern for parents.
A settlor who sets up a lifetime trust for his unmarried minor child (beneficiary) with the aim of applying the income during their minority will be taxed as if it is income of the settlor’s. However, a settlor is able to create a trust and accumulate the income until his children become 18. Once a beneficiary attains adulthood the income applied to them becomes taxable on them individually and ceases to be taxed on the settlor.
A settlor can put up to £325,000 into this trust or an amount equal to their unused inheritance tax (IHT) threshold. By doing this an individual reduces their own estate by £325,000 thereby potentially saving 40% tax on this amount (£130,000). Provided the settlor survives seven years their IHT threshold is reinstated and therefore they will be able to settle a further £325,000 upon trust after that 7-year period should they wish to.
The provision of university fees is extremely topical with increased in fees to over £9,000 a year. The trust income can be accumulated to plan for children attending university.
When a beneficiary attains the age of 18, the income can be paid to them and this can be applied for payment towards the university costs.
Income payments from the trust are paid net of income tax to the child. The child can thereafter reclaim part or all of the tax paid by the trustees via their own personal allowances. Where a trust has not been set up, the assets remain within the settlor’s estate and it is probable that the settlor may currently be paying university fees net of income tax (potentially up to 45%, which is not recoverable). Therefore, by placing the income producing assets into trust they are able to make the provision for university fees more tax efficient.
In addition to the above both parents may combine the amounts they put in to trust up to £650,000. This can be done every seven years.
This further increases the total IHT and income tax savings as well as the income available to meet the ever increasing costs of university.
Benefits of Using a Trust
- Combined tax saving of £20,000 to £30,000 a year
- The ability to pay for fees in advance thus taking advantage of discounts
- Peace of mind knowing that your children and grandchildren’s education and maintenance are always provided for
- Flexibility and safeguarding of family assets
- A safe structure to pass assets down to the next generation
By Ed Robinson TEP