Trust a trust to protect your child’s education
SINCE 2002, private school fees have risen at 1.8 times the rate of inflation. The average cost today is £11,500 per year, up from £6,800 in 2002. Private education is becoming more of a luxury, and it may be a good idea to find a more innovative solution than relying on your Christmas bonus.
A trust, for example, has some significant advantages over other investment options. And it’s not just parents who can save for their child’s school fees. There are a number of taxation rules in trust law that, in certain circumstances, give extra advantages to grandparents.
According to Doug Bonar, director at School Fees Independent Advice, “the two main benefits of a trust derive from control and tax.” And there are two popular options – bare and discretionary trusts.
A bare trust is the simplest type of trust. The assets, and any income derived from them, are held in the name of a trustee. They are, however, under the absolute ownership of the beneficiary. As the settler, you will have no access to the trust, and no power to revoke it.
Bare trusts are particularly suited to grandparents. If you place assets in a bare trust for someone who is not your child, the income and capital gains are taxed as the beneficiary’s rather than yours. Thus, if their income and gains are less than the annual allowance (£8,105 and £10,600 respectively), they pay no tax.
In terms of inheritance tax, assets placed in a bare trust are regarded as a “potentially exempt transfer”. This means that, if you survive seven years from the date of the transfer of assets, they will not be liable.
If you are the parent of the beneficiary, the income tax guidelines for bare trusts are slightly different. An income of over £100 will mean the entire income is taxed at the parent’s rate rather than the child’s, until they reach 18 or marry.
There is one particular disadvantage of a bare trust. Granting full access to a potentially significant amount of money to an 18 year old may be seen as less than ideal. It is an issue of control. Ash Pankhania at Watermead Financial says that “you may wish to retain access to investments, or have multiple beneficiaries. In this case a discretionary trust may be better.”
A discretionary trust is held in your name, and does not have legally-binding beneficiaries. It gives you investment access, and the freedom to withdraw funds or close the plan.
The price for this level of control is that you lose many of the tax advantages you would have in a bare trust. Significantly for grandparents, assets in the trust remain part of your estate for inheritance tax purposes.
The rules for taxation are also much more complicated with discretionary trusts. For example, current HMRC rules state that trust income above the standard rate band (currently £1,000) is taxed to the trustee at special trust rates. If the settler has more than one trust, the standard rate band is divided equally by the number of trusts they have.
You should always seek the aid of an independent financial adviser when putting aside for an investment as large as school fees. A private education may be a luxury, but using a trust could be the first step towards your child coming top of their maths class.