David Downie, Technical Manager at Aberdeen Adviser, explores how grandparents can help fund the cost of higher education while retaining control over their wealth and potentially reducing their inheritance tax liability.
Almost 340,000* 18-year-olds applied for courses at UK universities starting this September. For many young adults this is an exciting new chapter in their lives, but enthusiasm may be tempered by the thought of how they are going to pay their way.
Student loans are available, but the possibility of facing debt in excess of £60,000 at the end of their course can be a worry. It may even prove a deal-breaker as to whether to go to university or not.
Some grandparents may be able to make a real difference to their grandchildren’s futures by helping them to graduate debt-free. And while helping their grandchildren, they could also be reducing their own estates for IHT.
This could of course be achieved by meeting the costs as they arise. But this time of year may be a prompt to start thinking ahead and consider setting money aside earlier in their grandchildren’s lives.
An offshore bond held in a discretionary trust is one solution, combining control with tax efficient investment.
The satisfaction of giving
Many grandparents often leave money in their wills for their grandchildren. But by making that gift during their lifetime, they get to see the benefit it has on their family on many different levels:
- They will have played their part in their grandchildrens’ futures
- A financial burden on their own children will be lifted
- At a personal level, they may have made IHT savings
The amounts needed can be substantial, particularly where there are several grandchildren. Grandparents willing and able to make such a financial commitment may insist on an element of control over who benefits and when.
They may also want a say in where it’s invested.
‘Controlling’ the gift
Concerns about giving grandchildren too much too soon may rule out absolute gifts. Making the gift into a discretionary trust may ease those fears and provide grandparents with the control they seek over who gets what and when, and over the investment decisions. Discretionary trusts are typically flexible enough to allow any future grandchildren to also benefit.
Offshore Bonds: meeting University fees
Offshore bonds score top marks here. During the investment period, the bond suffers no UK tax on income and gains, and tax is deferred for bond owners until money is withdrawn and a chargeable event occurs.
This simplifies matters for trustees of a discretionary trust as they have no income or gains to account for during the investment term.
And when university costs need to be met, policy segments can be assigned to the grandchild, who will be the person taxed on subsequent surrender.
But because they’re unlikely to have much income as students, they will have unused allowances and bands to cover the profit. The personal allowance is £12,570, the starting rate band for savings is £5,000, and the personal savings allowance is £1,000 – a potential total of £18,570 in all.
Over a typical three year University course, that’s £55,710 of chargeable gains which can be taken tax-free. With the capital returned as well, that should be more than enough to meet tuition fees and living costs for many students.
Funds could also be used to pay school fees prior to university, with a similar tax treatment of any gains. One way of achieving this is by making an absolute appointment of the required policy segments for the minor prior to the trustees cashing them in.
This should ensure that any gain is assessed on the child but note that this would not work if the settlor was the parent rather than the grandparent.
Alternatively, if not used for either of these two purposes, they could be used for other life events, such as getting on the property ladder.
The cost of an education
Loans are available to help with tuition fees and living costs. This year tuition fees can be up to £9,790 and student loans will usually cover these in full.
In Scotland, the thresholds and loan amounts are slightly different, and some may also be eligible for non-repayable bursaries. But the biggest single difference is that eligible Scottish domiciled students taking up studies in Scotland will not have to pay tuition fees.
Support for living costs is provided through a ‘maintenance’ loan. Living costs can vary greatly, with rent being the biggest component. For most, the maximum annual loan is currently £10,830 – a little more if studying in London, and a little less if living at home.
But the final amount received could be less, depending on parental income (or household income). The minimum loan will be just under half the maximum once parents earn more than around £62,410 (again this will be a higher figure in London). This could easily be breached where both parents are earners.
Many students who don’t receive the full maintenance loan are finding that their reduced loan is insufficient to meet the cost of their accommodation alone.
This means that they are typically relying on their parents to make up any shortfall and support their day to day living expenses. It’s easy to see how gifts from grandparents may help both grandchildren and their parents.
The terms of the loan are currently that interest will be added at RPI from the date loans are received. Once students leave university, loans will be repayable at 9% on any earnings above the threshold of £25,000.
This means that graduates could effectively be paying 29% on their basic rate income, and 49% (or even 54%) on income over the higher rate threshold.
Clearly, any financial help from grandparents or parents can significantly ease these worries leaving students to focus minds on studying and their future careers. This can be achieved in advance with an offshore bond in a discretionary trust.
Whilst the terms of financial support can and do change, a gift into a discretionary trust invested in a bond should be flexible enough to adapt to changes and ultimately can benefit all the whole family even if funds are not used towards the cost of an education.
*Growing 18-year-old population pushes UK university applicant numbers higher | UCAS
Main image: university, md-duran-1VqHRwxcCCw-unsplash
