How Margaret helped her grandchildren through university

An exciting time for children but not so much for their parents if they have not budgeted to help fund this expense.

How much can university cost?

In a word – going to university is expensive. On top of major items such as tuition fees and accommodation, there is the cost of living – rent, bills, food, books, broadband, mobile phones, travel and let’s not forget the beer! The list is endless and unless you started saving early how are you and your children going to foot the bill?

According to “The Guardian*”, it can cost around £85,000 per child per degree, depending on where the university is.

Using a growth rate of 3% net, you need to save £608 per month over 10 years to get £85,000. Or if you have a lump sum, £60,000 invested for 10 years should give you £85,000. This is a huge expense and if you have more than one child the amount multiplies. 

A lot of people leave it too late to start saving, with the result that their children or grandchildren may be saddled with debt for a long time to come.

Meet Margaret, the grandmother

Margaret (not her real name) is an 80 year-old widow and much-loved granny who has decided to help her children fund the university fees for her grandchildren. She is comfortably off but is surprised when her financial adviser tells her that her total wealth is over the inheritance tax threshold and if she does not take action, her family will have to pay 40% inheritance tax on the amount above the threshold.

Margaret tells her adviser that she is very keen to help her sons and daughters with the cost of university for their children and wants to know if she can combine this with IHT planning. 

Control over who gets the money

She is not keen for her children or grandchildren to have direct access, she wants to be in control of her funds. One of her children is going through a tricky patch in their marriage and she certainly does not want any of her hard-earned cash ending up as part of a divorce settlement. Then there is her son’s gambling habit to consider, he cannot be trusted with a large lump sum.

Her adviser tells her that using a trust is a sensible way of keeping control of the money and that two types of trust are commonly used for university planning: gift trusts and loan trusts. As Margaret is more than happy to give up access to her capital as the income from her NHS pension is ample for her needs she opts for a gift trust.

Her adviser recommends using a discretionary trust, as it’s up to the trustees to decide who, among the beneficiaries, will benefit and when they will benefit from the trust fund.

He tells her that she will be the first named trustee and she should choose the other trustees wisely as ultimately they will be managing the trust fund. He advises her to give the trustees a letter of wishes, so that when she dies they will know how she wants the fund to be divided. He also reminds her that a beneficiary cannot demand money from the trustees and that while their share is in the trust it does not form part of their estate for divorce, bankruptcy or inheritance tax. On her adviser’s recommendation, Margaret, opts to put the trust fund into a single premium life assurance bond. This can be an onshore or offshore investment bond. 

Beneficiaries likely to be non-tax payers

As Margaret is setting this money aside for a long time to benefit her grandchildren who will most likely be non-taxpayers when they benefit from it, she opts for an offshore capital redemption bond. This will ensure that the investment lasts until all the grandchildren who want to go to university benefit from it. Her adviser also suggests that she choose to have the maximum number of segments within the bond, which can then, in due course, be assigned to the various beneficiaries. 

The trustees can assign segments once beneficiaries reach age 18. There is no tax to pay when segments are assigned to beneficiaries. If the beneficiary later cashes in those segments, they, not Margaret, will pay the tax on any gain.

Her adviser tells her that if Jenny, the oldest granddaughter, decides to go to university at age 18 the trustees can assign some segments to her. If Jenny is a poor student and has no income, under current rules she will be able to use her personal allowance, the £5,000 savings rate, the £1,000 personal savings allowance and any 5% tax deferred allowance, so it is very unlikely that she will have any tax to pay.

Margaret feels that with this solution, she is killing two birds with one stone. After seven years the gift will be outside her estate for IHT purposes and she is putting the money aside for a very worthy cause indeed: her grandchildrens’ future.

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. Tax advice which contains no investment element is not regulated by the Financial Conduct Authority.

Find out more

If you would like to find out how you may be able to reduce IHT get in touch now. 

Call 08000 85 85 90 or email appointments@lighthousefa.co.uk.