Educating grandchildren is an expensive venture: it now costs in excess of £500,000 to send three children to private school, according to latest figures from Duncan Lawrie Private Bank. This will involve a significant financial sacrifice, even for a wealthy family. One way to help pay the bill will be for grandparents to make a contribution, which can be done by setting up a discretionary trust for educating grandchildren. This has the double benefit of efficient inheritance tax planning, whilst at the same time funding the grandchildren’s education.
Paul Barry, a Chartered Financial Planner at Duncan Lawrie Private Bank, commented on educating grandchildren:
“School fees will have to be paid for 10 years before all three children complete their education, assuming they start at age eight. At its peak, with all the children at school at the same time, the cost will hit £60,458* in one year alone. The demand on the parents’ finances is therefore considerable, which is why grandparents often offer to help out, but all of this requires very careful tax planning.”
Grandparents can individually offset the maximum amount of £325,000 permitted under the inheritance tax threshold, known as the nil rate band. This means a discretionary trust for educating grandchildren will not have an immediate tax bill. Assuming the grandparents live for a further seven years after the gift is made, the capital is outside their estate for inheritance tax purposes.
Even though the money is in a trust, the grandparents retain control of it, including making distributions of capital directly from the trust to contribute towards their grandchildren’s private school fees in the most tax efficient way. Trustees can also invest and manage the underlying trust fund using various asset classes such as cash, fixed interest and equities, timing dividends and interest receipts to match fee payments.
Stephen Pett of Legacy Protection Trusts on special trusts for educating grandchildren:
“Creating a discretionary trust, along with long term financial planning in association with your IFA, enables us to tailor solutions according to individual client needs. For instance, we can point out that flexible trust rules allow payments for grandchildren who have not yet been born, or cover any future change in circumstances such as divorce.”
*Figures are based on UK averages from the 2012 census from the Independent Schools Council, assuming three children attending day school between the ages of 8 – 18 and school fees rising annually at a rate of 5%.
Enquire about Private Education Trusts.