Unlocking Education: Allowing grandparents to support the future of their Grandchildren
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With exam season over, over 550,000 students are expected to take up places at UK universities in September this year. While this is an exciting new chapter for many young adults, the enthusiasm may be tempered by the daunting thought of financing their education. Student loans are available, but the prospect of facing debt exceeding £60,000.00 at the end of their course can be a significant worry. This concern may even influence whether to attend university at all.
Some grandparents are in a position to make a real difference in their grandchildren's futures by helping them graduate debt-free. Beyond aiding their grandchildren, grandparents could also reduce their own estates for inheritance tax (IHT) purposes. This support can be structured in various ways, such as meeting costs as they arise or setting money aside earlier in their grandchildren's lives.
There are a number of solutions available, depending on your personal circumstances which may combine control with tax-efficient investment and you should seek professional financial advice to fully understand your options.
The Satisfaction of Giving
Many grandparents plan to leave money to their grandchildren in their wills. However, by making that gift during their lifetime, they get to witness the positive impact on their family on multiple levels:
- Playing a Part in Their Grandchildren’s Futures: Grandparents can take pride in knowing they have directly contributed to their grandchildren's education.
- Relieving Financial Burden on Their Own Children: By assisting with educational expenses, grandparents can alleviate some of the financial stress on their own children.
- Potential IHT Savings: Making gifts during their lifetime may also result in significant IHT savings.
The amounts needed for education can be substantial, particularly for families with several grandchildren. Grandparents willing and able to make such a financial commitment may want to retain some control over who benefits, when, and where the money is invested.
Controlling the Gift
Concerns about giving grandchildren too much too soon may rule out outright gifts. Establishing a discretionary trust may mitigate these concerns by allowing grandparents to maintain control over the distribution and investment decisions. Discretionary trusts are flexible enough to accommodate future grandchildren as well.
Offshore Bonds: Meeting University Fees
Offshore bonds can be an excellent tool in this context. During the investment period, the bond suffers no UK tax on income and gains, with tax deferred until money is withdrawn, and a chargeable event occurs. This simplifies matters for trustees of a discretionary trust, as they have no income or gains to account for during the investment term.
When university costs need to be met, policy segments can be assigned to the grandchild, who will then be taxed on subsequent surrender. Since students typically have low income, they often have unused allowances and bands to cover the profit. The personal allowance is £12,570.00, the starting rate band for savings is £5,000.00, and the personal savings allowance is £1,000.00—a potential total of £18,570.00. Over a typical three-year university course, this amounts to £55,710.00 of chargeable gains that can be taken tax-free. This should be more than enough to cover tuition fees and living costs for most students.
A similar approach could be taken for school fees prior to university.
The Cost of an Education
While loans are available to help with tuition fees and living costs, they can create a significant financial burden. This year, tuition fees can be up to £9,250.00, and student loans usually cover these in full. In Scotland, eligible students studying in Scotland do not have to pay tuition fees. However, support for living costs varies, with rent being the largest component. The maximum annual maintenance loan is currently £10,227.00, slightly higher for students in London and lower for those living at home. The final amount received can be less depending on parental income.
For students who do not receive the full maintenance loan, the reduced loan is often insufficient to cover accommodation costs alone. This means they typically rely on their parents for additional support. Here, gifts from grandparents can make a significant difference, easing the financial pressure on both grandchildren and their parents.
The Implications of Student Loans
Currently, interest on student loans is added at RPI from the date loans are received. Once students leave university, loans are repayable at 9% on any earnings above a threshold, effectively increasing the tax burden. Last year, the repayment threshold dropped to £25,000 (from £27,285), and the write-off point for outstanding loans was extended to 40 years from 30 years. This results in many more graduates having to repay the loan in full.
Financial help from grandparents or parents can significantly alleviate these worries, allowing students to focus on their studies and future careers. An offshore bond in a discretionary trust is one effective way to provide this support, offering flexibility to adapt to changes in financial support terms and ultimately benefiting the whole family.
Potential Disadvantages
Loss of Control Over Assets: Once the money is gifted or placed into a trust, grandparents may have limited control over how it is used. Even with a discretionary trust, unforeseen circumstances or disagreements among trustees could lead to outcomes that do not align with the grandparents' intentions.
Complexity and Costs of Trusts: Setting up and managing discretionary trusts or offshore bonds can be complex and expensive. Legal and administrative fees can accumulate, and the process requires careful planning and ongoing management to ensure compliance with tax laws and to achieve the desired financial outcomes.
Potential Family Conflicts: Financial gifts can sometimes lead to family tensions or conflicts. Disparities in the amounts given to different grandchildren or disagreements about the use of funds can create friction among family members, potentially straining relationships.
Impact on Grandparents' Financial Security: Generous contributions to grandchildren's education can significantly impact grandparents' own financial security. If not carefully planned, these gifts could deplete their savings and affect their ability to cover their own future expenses, such as healthcare or living costs in retirement.
Conclusion
Grandparents' contributions towards their grandchildren's education can have profound benefits, including reducing financial burdens and creating potential tax savings. However, these contributions should be carefully structured to ensure control and tax efficiency. Offshore bonds held in discretionary trusts can present a valuable option for achieving these goals. As with all financial decisions, it's crucial to seek professional financial advice to navigate the complexities and make the best choice for your family's specific needs.
Supporting Source – Abrdn TechZone