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Using Trusts to pay for children’s university fees

Apr 1, 2020

In our last blog, we looked at the benefits of grandparents supporting their grandchildren through educational. We highlighted the enormous potential tax savings (as much as £30,000 a year) that can accrue. This month, our focus shifts to parents and how they can use trusts to benefit their children in a tax-efficient way.

Trusts for university fees - addressing an ever-growing parental concern

‘How do we support our child through university?’ A cry you’ll often hear from parents of teenage children. Although there’s the Student Loan scheme, the prospect of your child being saddled with thousands of pounds of debt might make you uncomfortable. So - what’s the answer?

Setting up a trust

An excellent option is to set up a trust. If you do this while your child is still under 18 and unmarried, and you do this to supply them with income, then the government will you’ll pay tax, as though the income were yours. However, if you create a trust and accumulate the income until the child reaches 18, then that income becomes taxable for them.

You can put up to £325,000 into this trust, or an amount equal to your unused inheritance tax (IHT) threshold.  By doing this, you reduce your estate by £325,000. This will save you 40% tax ( up to £130,000).  Provided you survive seven years, then your IHT threshold is reinstated, enabling you, if you wish, to place a further £325,000 in trust.

Paying for university fees

With university fees sometimes exceeding £9,000 a year, the trust can come in handy. Here’s how.

When your child reaches 18, they can draw income from the trust, which then pays for their university fees. The income they draw will be net of income tax to the child who can then reclaim part or all of the tax paid by the trustees via their own personal allowances.

Let’s say you hadn’t set up a trust. Where would you stand? The funds would remain within your estate. It’s likely that you’ll be paying university fees net of income tax (potentially up to 45%, which isn’t recoverable).  So - by placing the income-producing assets into trust, you’ll be making the provision for university fees much more tax efficient.

Of course, this plan isn’t restricted to just one parent. Both of you can combine the amounts you put in to trust up to £650,000.  You can do this every seven years.

Each time you do this, you’ll be increasing your total IHT and income tax savings, while at the same time, increasing the income available to meet the ever-increasing costs of university.

Ask the expert - always

Trusts are an excellent and legitimate way to support and protect your loved-ones - both in terms of their early adulthood and their inheritance. Trusts and the enormous benefits they bring are our speciality. So, give yourself peace of mind. Get in touch, and we’ll answer all the questions you might have.

Contact Tim Mullock on 01234 713021.
Or email Tim.Mullock@AdeptAssetSolutions.co.uk

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