July 19, 2019
Average fees for private day school in the North East are currently around £12,000 per year* and our research indicates recent increases at a rate above annual inflation. So the lifetime costs of private education can easily equate to a seven figure sum for a family, with those uniforms, school trips and extracurricular sporting, musical and social activities to pay for too.
While parents will generally have to use their earnings (after tax), grandparents could have savings above and beyond their own needs, thanks to good pensions and more reasonable outgoings in retirement. Indeed, a common concern for grandparents is their inheritance tax (IHT) position, which, in its very simplest form, could be a 40 per cent death tax on assets above, currently, £325,000 per person.
There is an option that could help grandparents with their IHT planning and give the priceless satisfaction of playing an active role in their grandchild’s development.
The principle is that through a lump-sum gift grandparents could create an Absolute Trust for the benefit of a grandchild. The trust can then allow the trustees (usually the parents) to use that provision for the general education, maintenance and benefit of the grandchild.
For example, let’s say a grandparent makes a gift of £250,000 into such a trust for the purpose of school fees planning. The IHT treatment is such that the gift from a grandparent could be treated as a potentially exempt transfer (PET), meaning that it could escape the IHT net after seven years. This could eventually represent an IHT saving of £100,000. Any growth in the value of the trust fund could also be IHT efficient from day one; a suitable investment policy is usually put in place to underpin the trust’s long-term objectives.
The use of a suitable trust could also provide peace of mind in knowing that there is a formal arrangement in place, which could continue beyond a grandparent’s death – a fantastic legacy in remembrance and practicality for the family’s future generations.
This is a very broad outline of just one option. A more flexible and sophisticated discretionary trust might be a better route for some families, giving the trustees greater control and protection. A discretionary trust could still offer equivalent levels of IHT savings, but its tax treatment is not as straight-forward and so, as ever, there will be pros and cons to consider.
Other financial planning, which ought to form part of a family’s school fees plan, could include the use of tax efficient investments, such as ISAs, offshore bonds and perhaps even pension contributions, notwithstanding sensible use of valuable tax breaks, such as capital gains tax exemptions and planning around the income tax thresholds.
Life assurance is also far too often overlooked. Consider carefully the need to meet financial commitments following a death in the family. Mortgage repayments and school fees can be a family’s largest two financial commitments. Leaving loved ones with insufficient provision is unthinkable for obvious reasons, but very sadly it can and does happen.
Care should also be taken to ensure that any financial plan and its underlying components are regularly reviewed. Corrective intervention will inevitably be needed from time-to-time, taking into account any changes, such as a family’s practical needs, the available financial resources, changing tax rates and the variabilities of investment performance, for example.
At Womble Bond Dickinson Wealth Ltd, we have a renowned team of financial experts, working in tandem with highly-qualified and experienced lawyers at Womble Bond Dickinson LLP.
Together, we can help families consider the affordability of lifetime gifting, the appropriateness of different legal structures, the suitability of investment strategies and all those gloomy ‘what if ’ scenarios.