Use of trusts in a school fees savings plan
There are considerable benefits in having a planned approach to funding private school fees. Taking advantage of tax-efficient structures for example can ease the burden on your finances while minimising impact on day-to-day access to your capital.
As with all forms of tax planning, you should first identify what your objectives are before you look at options for a school fees savings plan. For example:
- How many children will you be funding, and for how long?
- What does your asset portfolio currently look like?
- What level of access will you need to your capital?
- What is your wider financial position, including financial income and interests e.g. pensions, are you a family business owner?
- What level of return will you require to keep pace with the rising cost of school fees and ensure you can meet the fees for the duration?
There are many tax planning tools and investment structures to consider as part of your school fees saving plan. One of the more widely used structures, often used due to its added tax-efficiencies, is the trust.
Trusts and the school fees savings plan
Through effective use of a trust, families can realise their ambitions for private education while enjoying favourable tax treatment and a relatively high degree of protection and control over their capital assets.
There are many different types of trust which could be explored as part of your tax planning.
By way of example these could include:
Family business trusts
The central benefit of the family business trust is that they may be used to pay for family expenses, such as school fees.
The requirements for a family business trust (FBT), put very simply, are:
- the parents must own shares in a family trading business; and
- the grandparents are happy to contribute to their grandchild(ren)’s school fee costs.
In such circumstances, it should be possible to use a trust to hold shares in the family business, for dividends to be paid in respect of those shares, and to make use of the child(ren)’s tax-free personal allowances (as opposed to being hit by the parents’ higher rate of tax) in respect of those dividends.
This type of exercise might form part of the general succession planning exercise of transferring the interest, and value, tied up in the shares to the next generation. The use of a trust, as well as assisting with the school fees, will potentially provide a much longer and more important role in protecting this capital from financial predators (and perhaps the children themselves!).
A bare trust is the most simple of trust types. The trust is set up with a specified list of beneficiaries, and distribution of capital and income also defined. These characteristics are then fixed for the duration.
In the context of school fees planning, bare trusts are often used by grandparents seeking to contribute to school fees. They nominate their grandchildren as beneficiaries and determine that income arising is to be utilised in payment of school fees, while the capital asset will eventually come into their grandchildren’s hands at 18.
Bare trusts are often used to transfer assets to minors, since ownership passes immediately to the beneficiaries (thereby reducing the estate of the settlor and laying early foundations for IHT exemption) while remaining under settlor instruction, at least until the beneficiary turns 18.
Importantly, under a bare trust, there is no flexibility to, for example, include additional beneficiaries – say if a new grandchild is born – which may not suit all circumstances.
This does however render the reporting requirement simpler than other forms of trust, and the administration costs relatively low.
The discretionary trust offers just that – discretion on the part of the trustees. This is useful where there are multiple parties wishing to contribute to school fee payment – e.g. grandparents as well as parents, who require flexibility as regards how much, when and how contributions will be made.
Under a discretionary trust, beneficiaries have no absolute right to receive either capital or income from interest arising.
Instead, the trustees assume control over the assets held in trust, and are permitted to make decisions for example about distribution. The underlying requirement is that these trust decisions must be in the beneficiaries’ best interests – such as in payment of school fees.
With flexibility however comes higher set-up costs and more (onerous) administration, particularly where the flexibility is acted on with changes to the trust terms e.g. by adding new beneficiaries (a new grandchild perhaps).
Furthermore, as the beneficiaries of the trust do not have any interest in possession in the trust then the trustees are subject to tax at the highest rates (with the benefit of a nominal allowance).
Wider tax implications of using a trust
For school fees planning, the protection provided by trusts may for many outweigh projected future financial liability – again, it becomes a matter of being clear on your objectives and opting for planning solutions that suit.
As such, it is important when considering use of trusts to understand the wider tax implications that may arise, for example:
Depending on the value of the assets and the availability of any reliefs, such as Business Property Relief (“BPR”) and exemptions, there may be an inheritance tax liability on assets:
- transferred into a discretionary trust
- held within a discretionary trust
- transferred out of a discretionary trust
Other considerations include:
- A gift into a bare trust is treated as a “potentially exempt transfer” (PET), meaning there is no immediate inheritance tax charge on the gift and there will be no charge at all if you survive the date of the gift by seven years.
- An individual can transfer up to £325,000 and a couple can transfer up to £650,000 into a trust without incurring inheritance tax liability.
Seek advice on your specific circumstances.
The income tax position of a trust will depend generally on whether the trust is a discretionary one or an interest in possession / life interest trust.
In the former, as there is no identifiable beneficiary with an absolute interest, then the trust suffers tax at the Rate Applicable to Trusts. This is a bad situation, as virtually all of the income will be subject to tax at the very highest rates of income tax (ie 45% rate for non-dividend income).
However, in the latter, the beneficiary has an absolute interest in the income of the trust and, as such, the income is attributed to the beneficiary. This enables their personal allowances and basic rates potentially to be applied in calculating the overall tax liability.
A bare trust, which is a simple nominee agreement, will find the income and gains of the bare trustee being taxed as if arose to the beneficiary. One major exclusion to this rule is if the gift on to bare trust is made by a parent to a minor child and the income for the year exceeds £100. In this scenario, the income is treated as that of the parent who made the gift.
Capital gains tax
Assets standing at a gain can be transferred into a discretionary trust without an immediate capital gains tax charge, providing there is no benefit to the settlor or their dependents. Any gain on the assets can be ‘held over’ so that the trustees ‘acquire’ the asset at the same value as the settlor.
It is not possible to hold over the gain on a transfer of assets into a bare trust, so there may be capital gains tax to pay on the transfer.
If trustees realise a gain on the disposal of an asset, capital gains tax may be payable.
Enterprise Tax Consultants can advise on the use of trusts in a school fees savings plan
A school fees saving plan is a prudent measure in meeting the financial demands of private education.
Trusts are one possible solution for planning for school fees, potentially offering multiple benefits by way of tax-efficiency and asset protection, but they must be selected on the basis of meeting your specific needs and circumstances.
ETC are experienced advisers on the suitability of trusts for schools fees planning. Our services include:
If you have a question relating to school fees savings plan and the use of trusts, please contact one of our chartered tax advisers.