18th October 2017
Planning for school fees using investment bonds and trusts
Parents planning for private school and university fees are often unaware of a little-known quirk in HMRC rules that could see them paying tax on their children’s savings. For higher-rate taxpayers saving hard for future school fees, the tax bill can really add up.
The parent tax trap
It’s common for parents (and other family members) to help plan for a child’s future by setting up a savings account in the child’s name. Yet, if the interest on money given by a parent is more than £100 in a tax year, the parent must pay the tax on the interest, if it’s above their own personal savings allowance. For this reason, it doesn’t make sense to save by simply putting money into a child’s account.
Money can be invested into a Junior ISA where interest would be sheltered from income tax on the parent. However, as the limit is £4,128 per year, per child another way around this is to put the money into an investment bond within a trust. Thanks to the flexibility of bond segments, portions of the bond can be assigned directly to the child when school fees are due, without the parents paying unnecessary tax.
Planning now helps reduce the future tax burden
The beauty of trust arrangements and investment bonds is that income only arises when you take money out of the bond (not on a regular basis, as with savings accounts). This means, as the money grows, it’s essentially tax-deferred, allowing parents and other family members to build up a good amount of capital. Then, when money is withdrawn, there are ways to manage the tax burden within the child’s personal allowance.
As with most aspects of personal finances, looking ahead and planning at the outset can save quite a bit of tax over the long term. That’s why Ascot Lloyd is actively working with parents and other family members to plan for future school fees, including using trusts and bonds. Or, where investment bonds and trusts are already in place, we work with families to calculate the best way to release money from the investments they already have.
This is a complex area, and one that’s central to your child’s future, so professional advice is a must. Discover how our financial advisers can help you plan for a bright future while minimising the tax burden.