Many parents value a private school or university education for their children but the cost continues to increase and can be hugely expensive over time. Parents can expect to pay £275,0001 for a private day school education between 4 and 18 years old and significantly more if children are boarding. Children not at private school but choosing to go to university can also build up significant debt from a combination of tuition fees and living costs over the duration of their studies.
Many grandparents will be keen to help with the cost of education for their grandchildren and may already be paying school or university fees directly out of their own income or investments. However, there may be an alternative option to consider; the bare trust.
The word ‘trust’ can ring alarm bells. Trusts can be complex, costly and involve considerable ongoing administration. A bare trust is more like a nominee arrangement than a conventional trust. A grandparent can open an investment account designated for their grandchild, with a gift, and the account acts as a default bare trust. The account can pay education fees directly.
The big advantage of a bare trust is the tax treatment. The money inside a bare trust is treated for tax purposes as if it belongs to the child. Grandchildren can use their own personal income tax allowance, personal savings allowance, capital gains tax exemption and dividend allowance each year.
In the new 2018/19 tax year this could allow income of £19,850 to be generated in the trust before any income tax is payable, assuming the grandchild has no other income. This is very tax efficient.
Other advantages of a bare trust:
Of course, there are always disadvantages to consider and taking advice is important. A common objection to a bare trust is that the grandchild becomes absolutely entitled to any money or investments remaining in the trust at age 18.
Some grandparents may baulk at the thought of giving a young person access to large sums of money. However, if the costs are known or can be estimated at outset the trust can be funded sufficiently to pay fees and leave a minimal balance by the time the grandchild reaches 18. If there is a balance remaining at 18 the grandchild could choose to use the funds for other purposes such as university fees or for a deposit on a first home. However, it would be their decision.
Before making significant gifts of capital, grandparents should always ensure their own long-term financial security. A cash flow plan will help here by looking at income and assets and the affordability of gifts.
The focus of this article has been on grandparents but can this type of planning also work for parents? Unfortunately, the answer is no. Using a bare trust where parents are gifting money offers no tax advantages and this is because of anti-avoidance rules.
If a parent establishes a bare trust, any income that arises is treated for income tax purposes as theirs and taxed at their marginal rate(s). These rules apply to trusts where a child under 18 is a beneficiary but the parent making the gift receives no benefit.
Other points to bear in mind:
1 Assuming costs of £15,000 per child each year inflating by 4% from age 4 to 18.
Rebecca Williams, Client Director