Buy into basic planning
Take advantage of your own ISA allowance and start saving early in order to build up a good pot of money, in a wrapper that is free from income and capital gains taxes, by the time your grandchild is ready to start prep school. Within the current ISA framework, two grandparents can inject £200,000 within five years – and that’s before the investment return is added.
Avoid inheritance tax
You may already know that an individual can make a gift of up to £3,000 per annum without implications for inheritance tax (IHT), but with school fees upwards of £I4,000 per annum, even this generous amount from a grandparent won’t go far. It’s less well known, however, that gifts of unlimited sums can be made without a grandparent having to worry about the ‘seven-year survivorship rule’ (gifts made three to seven years before your death, which are not covered by the nil rate band, are taxed on a sliding scale under ‘taper relief’) – as long as certain conditions are met.
Essentially, this means making a regular payment (termly fees, for example) as long as it is paid out of income, rather than capital, and providing you’re left with sufficient income to meet your needs. A consultation with an estate planning expert can help you ascertain whether or not you meet the criteria and advise you on how to keep adequate records to demonstrate that the gifts aren’t denting your capital and don’t reduce your standard of living.
Turn to a trust fund
A discretionary trust is a great option for many reasons: it provides protection for your assets in the unfortunate event of divorce or bankruptcy in the family, for example, and the trust assets can generate income to fund the school fees. It allows for flexibility and control with the trustees deciding how much to give whom, given that different grandchildren may have differing needs and require different kinds of financial support throughout their education. For inheritance tax reasons, grandparents need to be excluded from being beneficiaries themselves, and they’re entitled to put in the amount of their available nil rate band (£325,000 per person) without triggering an IHT charge. It’s also a good way to minimise tax, since payments made for school fees are counted as distributions to the grandchild, even if they’re paid directly to the school – and some or all of the income tax paid by the trustees may be claimed back using the child’s available personal allowance.
Free up your pension
In April 2015, changes were made to the law to allow greater flexibility over personal pensions. These invested funds can be accessed from the age of 55 years and 25% of the fund can be taken as tax-free cash, with various drawdown options available. Withdrawing from a personal pension is not the best solution for everyone, though, as it tends to be financially advantageous to keep funds in an lHT-exempt environment for as long as possible.
If you would further advice, please get in touch.