Having a family can be costly, so preparing early for future educational costs should be carefully considered. Recent statistics estimate that the cost of raising a child to the age of 21 amounts to an estimated £250,000. With many parents returning to full time employment and the costs of private nursery and schooling fees, along with further education costs increasing above wage increases, there are steps that grandparents can take to assist with the educational costs of the younger generations of the family, where they are in a position to do so.
Setting up a Bank Account
One of the safest ways to start building savings early is to open a Child Savings Account in the child’s name. The grandparent can be the signatory and deposit money into the account when they wish. As long as the child earns less than the annual personal allowance (currently £11,850), were any income tax paid on any interest gained, it can be reclaimed.
Using your available Inheritance Tax Allowances
Where grandparents wish to contribute more, they may decide to utilise their Inheritance Tax allowances to assist with the educational costs of their grandchildren. At present, every individual has an annual allowance of £3,000 per tax year which they can gift without any Inheritance Tax consequences. This in turn can save £1,200 of Inheritance Tax on the death of the grandparent, should their estate be taxable. If no gift (reasonable Birthday and Christmas gifts are excepted) was made in the previous tax year, a further £3,000 can be gifted. That is £12,000 which could be jointly gifted by grandparents to assist with educational costs, if they have made no previous gifts in the last two tax years. A potential Inheritance tax saving of £4,800.
Grandparents can also assist by making regular gifts out of their surplus income, providing that they can show that such gifts will not have a detrimental effect on their standard of living. This allowance is not automatic on the death of the grandparent and evidence of the intention to make regular gifts out of surplus income must be submitted by your Executors to HMRC along with the Inheritance Tax Return. If you decide to use this allowance, you should sign a “Letter of Intention”, which can be held alongside your Will, and keep suitable records of your annual income and expenditure and the gifts being made. To assist your Executors after your death, you may wish to complete an Inheritance Tax Form (IHT403) each tax year to provide evidence of your surplus income, and store the form with your Will or personal papers. Any monies for the benefit of a child should where possible be paid direct, rather than to a parent, as that may have tax consequences.
Setting up a Trust
For those grandparents who wish to make a larger contribution to their grandchildren’s future educational needs, the establishment of a Discretionary Trust may be the most appropriate option.
A lump sum can be gifted to the Trust and the funds invested appropriately, with assistance of a financial advisor. Both the income and capital generated from the Trust fund can be used to assist with educational costs. As part of establishing the Trust, you, as the “settlor”, appoint Trustees to administer the Trust fund on behalf of the beneficiaries. The fund will not belong to the grandchildren, which will means that the Trustees have ultimate discretion as to how the funds are used to benefit the beneficiaries. Furthermore, if there are any funds remaining in the Trust after the grandchildren have finished their education, the Trust can be wound up and the remaining funds transferred to the grandchildren or the trust can continue to benefit future generations.
Professional advice should always be sought before establishing a Trust, to make sure that all regulatory compliance matters and tax implications for the settlor, trustees and beneficiaries have been considered. Seeking professional advice will also assist you in determining if a Trust is the most appropriate option for your family.
Stephanie Pratt is a Partner in our Private Client Team. For advice on gifting and setting up trusts please contact Stephanie on 01334 659755 or alternatively contact any member of our Private Client Team.
