Helping your grandchildren leave university debt free
With September approaching, more than 550,000 students are expected take up places at UK universities this year. What should be an exciting new chapter in their lives can be hampered by worry of affordability. While student loans are available, the typical debt of obtaining a degree is £60,000 and this can be a deterrent for some of those considering higher education. A study by Equifax found that Half (49%) of university students and graduates aged 18-22 said that the prospect of taking out a student loan made them think twice about attending university.
Some grandparents, if in a fortunate enough position to do so, may be able to make a real difference to their grandchildren's futures by helping them to graduate debt-free while also reducing their own Inheritance Tax (IHT) liability. This could of course be achieved by meeting the costs as they arise, but for those with more time to plan, it may be prudent to consider setting money aside earlier in their grandchildren's lives.
In this article, we touch on the basics of how an Offshore Bond held in a Discretionary Trust can work well in combining control and protection with a tax efficient investment.
The joy of gifting now - A default plan for gifting to loved ones may be to allocate an amount in your Will, though for many, it can be far more satisfying gifting while you can see the impact the gift can make to their lives. Helping grandchildren through university can help alleviate debt related worry and allow them to focus on their future studies and careers. In addition, if the grandparents have an IHT liability, gifts into a bond would be considered A Chargeable Lifetime Transfer (CLT). This is a transfer of assets outside of someone’s estate during their lifetime that is subject to potential IHT if the value exceeds their available Nil-Rate Band (NRB - the threshold amount up to which an estate can be passed on without incurring IHT) If, however, the donor survives for seven years after making the transfer, it may reduce any IHT due on the gift to zero.
Offshore bond – how it works - An Offshore Bond is essentially an investment product issued by a provider based in a low-tax jurisdiction. This allows the funds to grow tax-efficiently while also offering tax deferral benefits, enabling investors to potentially postpone and/or reduce their tax liabilities on income and gains until funds are withdrawn. When funds are needed, there is an option to utilise the 5% withdrawal rule which allows bondholders to withdraw up to 5% of the initial investment each year without immediate tax liability, deferring taxes until the total amount withdrawn exceeds the initial investment.
Protecting the funds - Placing the Offshore Bond into a Discretionary Trust (a flexible type of trust) where the grandparents would be trustees, may ease any concerns about gifting money directly to the children. It would provide grandparents with full control over the investment decisions and who gets what and when. They are also typically flexible enough to allow any future grandchildren to also benefit if there are funds left over.
The taxable nature of the Offshore Bond also means simplified administration for the trustees as they have no income or gains to account for during the investment term. When university costs need to be met, the 5% withdrawal rule can be used or segments of the bond can be assigned to the grandchild, who will then be the person taxed on surrender. Below is a basic example strategy of how it might work:
1. Initial Investment: Invest a lump sum in an Offshore Bond while the child is young.
2. Growth Phase: Allow the investment to grow tax-deferred over the years.
3. Annual Withdrawals: When the child starts university, begin making partial withdrawals within the 5% annual allowance. This can help cover yearly tuition fees and living expenses without immediate tax liability.
4. Assigning the Bond: If beneficial, assign the bond to the child once they turn 18 or older. The child can then encash parts of the bond, potentially paying little to no tax if they have low levels of income.
5. Final Encashment: After the university period, any remaining bond value can be encashed or continue to grow.
Due to the complexity of Offshore Bonds and their tax implications, we strongly suggest that you engage with a Financial Planner or tax professional if you are considering this as an option. If you would like more information on how a Financial Planner can help you, please go to www.broadwayfp.co.uk.
