For parents who have made the decision to privately educate their children, or wish to fund them through university, the opportunity to protect a lump sum for the express purpose of their children’s education is attractive. The fact that it may be possible to achieve this with additional tax benefits is a welcome bonus.
The Inheritance Tax Act 1984 includes an often overlooked inheritance tax relief for lifetime transfers made by a parent for the maintenance, education or training of a child (whether their own or that of their partner). It is available for children up to the age of 18, or until they finish in full-time education.
A School Fees Trust takes advantage of this relief, as money transferred to the trust is not subject to an inheritance tax charge as it could be on creation of a different type of trust.
Once assets are in the trust, they are better protected against events that may adversely affect the parents’ finances, such as bankruptcy or divorce. In addition, if the parent should die, the assets within the trust will not be subject to inheritance tax at 40%, as they would be had they remained in the parent’s estate. The Nil Rate Band (the first £325,000 of a persons’ estate which is free from inheritance tax), would also not be reduced, as it otherwise would be.
When might it be suitable?
If you are married or in a civil partnership and you intend to privately educate your children and/or fund them through university
You have money set aside that could be transferred into trust; and
You are confident that you can afford to ring-fence those sums for this purpose and would not require them for your own financial security.
The advantages of a School Fees Trust are primarily asset protection and inheritance tax planning. The trust would otherwise normally be tax neutral (i.e. in relation to income tax and capital gains tax) and in-depth tax advice should be taken before a decision is made to proceed.
It is essential that the funds transferred into the trust do not exceed that required to educate the children, so actuarial advice would normally need to be sought.
A School Fees Trust can be an effective step in the overall estate planning journey. However, it is a bespoke option and should be considered carefully as part of a comprehensive estate planning review. It is important that qualified, experienced legal and tax advice is sought as it may be that, depending on your personal circumstances, other options are more appropriate. We would be delighted to discuss all of these options with you.
The private client team at asb law LLP are experts at providing bespoke estate and tax planning advice to individuals and families. If you are interested in exploring these issues further, do feel free to get in touch.
For more information please contact Eleanor Gadd, Associate, Private Client - Family.
Published: 29 Jul 2016