Funding for University
Do you want your children or grandchildren to be burdened by debt when they come out of university? If not, you’ll want to help them with funding for university and it is vitally important that you hold your savings in the most tax-efficient way possible.
With the cost of attending university still rising, students need to budget for something in the order of £22,000 per annum (Source: TopUniversities.com, July 2017) for tuition and living costs alone, with no allowance for travel, food and other discretionary expenditure. In the same month, the Institute for Fiscal Studies forecast that UK students would graduate with average debts of £50,800.
An investment – lump sum or regular savings – into an offshore bond written under a Discretionary Trust could be a particularly attractive way of pre-funding at least some of these costs.
Why a Discretionary Trust?
A Discretionary Trust gives the Trustees the control over when and how the student receives financial assistance. The student cannot demand that payments are made, which could be the case with many other forms of Trust planning.
You set-up a Discretionary Trust of which the student is included as one of a number of potential beneficiaries. The Trustees have the power to use the funds in the Trust for the maintenance, education and benefit of the beneficiaries. A “Letter of Wishes” from you to the Trustees gives them guidance on how you would want them to exercise their discretion.
What are the Inheritance Tax implications?
You gift capital to the Trustees and whilst this will be a Chargeable Lifetime Transfer for Inheritance Tax (IHT) purposes, it is likely to be covered by one of two allowances or exemptions. Any lump sum of less that the current Nil Rate Band (£325,000 until April 2021) will not incur an immediate charge to IHT and will be outside your estate after 7-years. Regular contributions that are demonstrably affordable out of your income are likely to be exempt from IHT from day-one – see my companion blog.
Why an Offshore Bond?
By choosing an offshore bond the Trustees have a wide choice of investment opportunities, so the investment strategy can be tailored to the desired outcome. Gifts by parents, but not grandparents, have potential Income Tax consequences – any taxable income over £100 per annum is still taxable on the parent – but an offshore bond is a tax-shelter, so no taxable income arises.
Whilst the Trustees are potentially liable to tax at 45% on the gains within the bond, any such tax liability only arises when the bond, or a part of it, is encashed. By segmenting the bond into a series of mini policies, when it comes to making distributions, the Trustees can assign segments to the student. The assignment is tax free and the student uses their Tax Allowances to offset any tax charge when they encash the segment(s) assigned. With a full Personal Allowance available – £11,500 in 2017/18 – often this will result in either a nil or very modest assessment to tax.
If you want to consider funding for future university costs then ask me today or complete the form below, including your date of birth, and I’ll give you a link to our risk profiling tool to start the advice process.