Wealthy grandparents (or any relatives of minor children other than the parents) can fund schools fees or any other expenses for their grandchildren in a tax-efficient way. In particular, a trust can provide a useful way to improve the overall financial position for the extended family.

How does this work?

Relatives can place investments in a specific fund (usually a discretionary trust) to benefit other members of the family leaving those funds to accumulate income and to pay for school fees and other expenses over a period of time.

What are the benefits?

1. The separation of the funds allows them to be managed for the benefit of others when they need it.
2. Any investment income and gains are no longer charged to tax in the hands of the person providing the funds (usually the grandparents).
3. Any income in the fund is chargeable to income tax, usually at a special rate applying to trusts, but this is generally repayable to the grandchildren when the income is paid out to them.
4. The benefits can extend into adulthood for the children, for instance to cover university fees.

Why is this arrangement tax-efficient?

• A transfer of assets into a discretionary trust can avoid a capital gains tax disposal by claiming holdover relief.
• The income of the trust (other than dividends) is currently taxed at a rate of 45 per cent, but if distributed to low-income beneficiaries they can generally recover most, if not all, of the tax by submitting a tax repayment claim.
• The value of assets held in the trust may normally be kept out of the settlor’s estate for inheritance tax purposes, so long as they are excluded from benefit and live for at least seven years after the transfer. This may also depend upon whether other gifts or trust have already been made by the same person.

Clearly, individuals should only give away assets and income if they can afford to do so but the above arrangement can avoid the provider of funds first paying income tax and then making gifts out of the net income. In addition, documents will need to be implemented and so legal advice should be sought to ensure risks are properly considered and compliant with the law.

As with all such tax situations, advice should also be sought before proceeding. For further details call Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk

Tags: UK200

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