With exam season over, more than 550,000 students are expected to start at UK universities in September.
For many, this is an exciting chapter, but the thought of paying for it can dampen enthusiasm. Student loans are available, but facing debts over £60,000 by graduation is daunting and might deter some from attending university.
Grandparents can significantly impact their grandchildren’s futures by helping them graduate debt-free, potentially reducing their own estates for inheritance tax (IHT) as well.
One approach is to cover costs as they arise, but it’s wise to start planning earlier. An offshore bond held in a discretionary trust offers control and tax-efficient investment.
The satisfaction of giving.
Grandparents often leave money in their wills, but gifting during their lifetime allows them to see the benefits firsthand. This:
– Supports their grandchildren’s futures
– Eases financial burdens on their children
– Provides personal IHT savings
Significant amounts may be needed, especially for multiple grandchildren. Grandparents might want control over who benefits and when, and where the money is invested.
Controlling’ the gift
Concerns about giving too much too soon can be managed by using a discretionary trust, which provides control over distributions and investments. Discretionary trusts are flexible enough to include future grandchildren as beneficiaries.
Offshore Bonds: meeting University fees
Offshore bonds are beneficial because they incur no UK tax on income and gains during the investment period, deferring tax until money is withdrawn. This simplifies matters for trustees since they don’t need to account for income or gains during the investment term.
When university costs arise, policy segments can be assigned to the grandchild, who will then be taxed on the withdrawal. Students, having low income, will likely have unused allowances covering the profit. Over a three-year course, this could allow up to £55,710 of chargeable gains to be taken tax-free, sufficient to cover tuition and living costs.
Funds can also cover school fees before university, with similar tax treatment. If not used for education, they can support other life events, like buying a home.
The cost of an education
Tuition fees and living costs loans are available. This year, tuition fees can reach £9,250, with student loans typically covering these. In Scotland, eligible students studying in Scotland do not pay tuition fees. Living costs vary, with the maximum loan being £10,227 annually, adjusted for London or living at home. Parental income affects the final loan amount, with higher earners’ children receiving less.
Students not receiving the full loan often find it insufficient for rent alone, relying on parents for support. Grandparents’ gifts can alleviate this burden.
Current loan terms add interest at RPI from the loan’s date. After university, repayments are 9% of earnings above a threshold, meaning graduates might pay 29% on basic rate income and up to 54% on higher rates.
With the repayment threshold recently lowered and the write-off period extended to 40 years, many graduates will repay the loan in full.
Financial help from grandparents or parents can ease these worries, allowing students to focus on their studies and careers. An offshore bond in a discretionary trust is flexible enough to adapt to changes and benefit the whole family, even if not used for education costs.
Based on the Standard Life blog post.