The problem: A couple wish to pass down their wealth to their grandchildren without giving them control of the funds absolutely at 18. They would like to ensure the funds are suitable to meet the different requirements of the beneficiaries at various life stages, whilst keeping the tax impact to a minimum. What is the best solution for passing on wealth?
The Solution: For many grandparents, supporting their grandchildren financially not only provides great peace of mind but also provides excellent tax planning opportunities. However, there may be concerns about gifting funds absolutely as the recipients might waste the money.
Before any lump sum of money is needed, the couple could consider using a discretionary trust. This will not only enable the trustees to issue ad hoc payments to beneficiaries but also allows them to make absolute appointments to a bare trust for beneficiaries who are under 18. This means that any taxable gain will be assessed against the minor beneficiary, using either their income tax personal allowance or capital gains tax exemption. This ensures the tax liability does not fall on the trustees. As minors are less likely to have exceeded their tax limits this could result in significant savings for the trustees.
Although an absolute arrangement could be used from day one, this would mean all available funds would be absolutely owned by the beneficiary upon reaching 18. By using a discretionary trust where absolute appointments to a bare trust are made, specified sums (approved by the trustee) can be released over time and any additional assets will be “sheltered” from absolute ownership. This is because the funds will remain in a discretionary trust until the trustees wish to distribute them in full.
When it comes to passing on money in order to cover a specific debt, there are two common financial challenges for the under 30’s that may be considered. The first of these is the increased (or likely) burden of student debt; the second is the requirement for a sizable deposit to enable independent living.
According to a recent study by the Post Office, the average age of a first time buyer in the UK is 30 and a recent survey carried out by PwC showed that student debt for those who started university after September 2012 is likely to be between £40,000 and £50,000. There may be some confusion over the best use of gifted money and clearly there are planning opportunities in this space.
While the burden of student loan debt may seem extreme, paying this off quickly with available cash may not be the most efficient use of funds, due to the student loan repayment requirements. Repayment is based on individual earnings and does not start until gross annual income is above £21,000 for courses started after 1 September 2012. The level of repayment will only rise as an individual’s earnings increase and any outstanding debt will be written off by the government after 30 years.
Given the low impact student loan liabilities have on mortgage lending, having available funds to be used as a deposit for a first home may in many cases be a more worthwhile option for grandparents wishing to support their beneficiaries. Additionally this will ensure the asset remains within the family, rather than repaying a debt which has no chance of growth.
Clearly individual circumstances should be considered but by using a discretionary trust to ensure tax efficiency and payment flexibility, or by helping grandchildren get on the property ladder, gifted money is more likely to provide long-term benefits.
Phil Carroll is financial planning expert at Skandia