The problem: After having been made redundant a few months ago, the client has been able to secure a new job and without drawing heavily upon his substantial redundancy payment. This was obviously a great relief as the client has a young family with a daughter aged 7.
The client is a higher-rate taxpayer and wants to turn what has been an unfortunate turn of events into a positive outcome and use the remaining redundancy payment to fund his daughter’s higher education. He is concerned that the costs of a good college, let alone university, are escalating quickly and unless he plans now it could become out of reach for his daughter – especially if including the associated living costs.
However, he does not wish to lock this money away as he appreciates better than ever the need to be able to access funds in the event of an emergency.
The solution: Given that the investment is likely to remain invested for over 10 years, the benefits of gross roll up which is offered by an Offshore Bond could be particularly attractive, as long as the money can then be withdrawn tax efficiently. Offshore Bonds allow a large degree of investment flexibility and the investment can be managed to a risk profile appropriate for when it is anticipated funds will be required. And of course any changes to the investments can be made without any tax liability.
Whilst invested the client will have access to the money in case of an emergency, although, if substantial sums are withdrawn in the early years, there could be some surrender penalties. However, once RDR friendly charging structures are rolled out it is likely that surrender penalties may be much reduced or removed altogether.
When the client’s daughter reaches higher education at age 16, the 5 per cent tax deferred withdrawals would have built up to 45 per cent (9 years x 5 per cent) – and a further 5 per cent for the following year. This would allow a substantial sum to be taken from the bond at this time without creating any immediate tax liability on the client.
Upon reaching age 18, and hopefully attending university, the client’s daughter is of an age whereby segments can be assigned to her. This is where multiple segments can prove useful as the client can assign to his daughter sufficient segments so as to take maximum advantage of her personal tax allowance. By doing this his daughter will then surrender the assigned segments and minimise the tax paid. The more segments originally set up, the closer to the personal tax allowance the amount can get. This can continue until the funds are exhausted or the necessary costs are covered. Even if this means that the amounts are over and above the daughter’s personal allowance, the tax paid will be substantially lower than if surrendered in the hands of the client.
A further advantage is that it can provide an inheritance tax saving. Assignment of the segments from the client to his adult daughter would not normally become exempt for IHT purposes for seven years. However, it is likely to be immediately outside the client’s estate as the transfer is for the education and maintenance of his own daughter while in full-time education. For greater IHT efficiency the whole bond could be placed in trust, though this may reduce the accessibility to the money for the client.
After university, assuming any funds remain, the client could either use the remaining segments as part of retirement planning, for example, or assign them to his daughter who may need this to help her buy her first home. During this time the investment profile could be managed appropriately and in a tax efficient environment.
Phil Oxenham is marketing manager at Skandia International