29th October 2016 at 6:00am
Being a grandparent can be one of life’s most rewarding experiences. And helping your grandchildren on the road to becoming financially secure and independent can make a real difference to your family on many levels.
Taking an active part in shaping their lives and seeing them benefit can be hugely satisfying.
Funding your grandchildren’s education costs
One area where many grandparents – and parents, of course – can make a real difference is by helping to fund education costs.
With average private school fees of around £15,000 a year* – double for boarders – and a 3-year course at some universities costing £54,000** or more, giving financial support for your grandchildren’s education can be nothing short of vital.
Taking an active part in their lives can be hugely satisfying
If you want to support them financially, what are your options when it comes to giving away your money?
Here are a few things to focus on.
Do you want to set money aside?
If you decide to build up your own savings to meet their future education costs, the advantage is you can still use your money for yourself if you need to, and you control who benefits and when.
But you’d need to consider that your money would still be inside your estate for IHT (Inheritance Tax) and there’s no guarantee it would ever be used as you had intended if you were to die before those education costs needed to be met. That’s unless you’d made that very clear in your Will.
As an alternative…
Give it to the children or their parents now and it may reduce your estate for IHT but you’d have no control over what the money gift is actually used for. It becomes theirs to spend as they wish.
A trust could be the answer
A combination of a trust and tax-efficient investments could tick most of the boxes.
Making a financial gift through a discretionary trust can give you the control you want. You choose your own trustees and you can be one yourself, allowing you to decide who gets what and when.
Ring fencing the money in this way not only gives you control, it means your IHT bill may be less when you die. If you survive for seven years after making the gift, it usually sits outside your estate.
The size of gift you make may, however, be limited if you wish to avoid other IHT charges associated with the trust – and taking advice here is essential to getting this right.
What can trustees invest in?
ISAs can’t be held in trust. Other investments, such as unit trusts, can – but income and gains may be taxable along the way, potentially reducing net returns.
The good news is that tax on offshore bonds is only assessed when money is taken out.
When money is needed to pay costs, as long as the bond is in the hands of your grandchildren at that time, the chances are that they will have unused tax allowances and there may be no tax to pay.
Tax on offshore bonds only assessed when money taken out
Of course, this would depend on whether they have any other income.
The income-tax allowances that may be available to them are the personal allowance (£11,000), 0% savings rate band (£5,000), and the recently-introduced personal savings allowance (£1,000).
And that all adds up rather nicely. Bond profits of up to £17,000 can be taken each year without any tax.
If you are considering ways to fund your grandchildren through education, as always we would recommend you talk it through with your adviser to find out what suits your circumstances.
Bond profits up to £17,000 can be taken out tax free each year
The information in this blog or any response to comments should not be regarded as financial advice and is correct as of October 2016. Tax rules depend on personal circumstances and can change in the future.
* Independent Schools Council Census and Annual Report 2016.
** English university fees, average living and accommodation costs, Student Money Survey 2016.