View more on these topics

The university of life

When children go to university life for their parents can work out to be extremely expensive. This is especially true if parents are having to pay the costs from taxed income.

The costs usually include a contribution towards the normal living expenses of the children and currently, for most of the UK, also include tuition fees – although this may change.

This article looks at a way in which the costs can be met in a possibly much more tax-efficient manner, if circumstances are favourable.

It is usually the wealthy client who benefits, as the planning involves the use of some capital set aside for the purpose in advance of the costs actually arising. Tax planning is, after all, invariably better eff-ected early rather than late.

The first problem to consider is that any gift by a parent to a minor child can be deemed a parental settlement. Any income arising on the capital representing the gift will be assessed on the parent if that income is more than £100 per annum.

This used to be able to be overcome by a parent gifting capital into a bare trust for the minor child, with the statutory provisions for advancing any of the capital for the benefit of the child or income of the trust being appointed to the child before they attain majority being excluded.

In this way, the personal allowance of the child could be used against the income of the trust each year. Thus, this planning would be very tax efficient if, as was likely, the child had, for example, no other assessable income.

The annual capital gains tax exemption of the child could also be utilised – although this has become more difficult since the legislation against “bed and breakfasting”.

Since March 9, 1999, for any new trusts or new money to existing trusts, this planning no longer works as far as income tax is concerned.

So, what can be done?

Planning can still be effective as long as no income arises to the trust from the investment until the child reaches majority. This could mean the use as an investment of a single premium bond – preferably offshore to obtain the advantage of the near gross roll-up whilst the investment is building.

The bond could be subject to a power of appointment interest in possession trust created by the parent with the appropriate child having the interest in possession.

The trust would not need to be “bare” and this would have the distinct advantage that the beneficiary child could not just close the trust and take all the funds immediately on attaining majority.

However, the trustees could make absolute appointments of segments of the bond annually to the beneficiary once that beneficiary reaches majority. The segments could then be advanced to the beneficiary for no consideration.

The beneficiary could then encash these segments, making sure, for example, that the personal allowance and 10 per cent income tax band were not exceeded in respect of the gains on those segments.

If the child had no other income, then, for example, using 2001/02 tax rates, gains of £6,415 could be realised with a total tax liability of £188. The personal allowance of £4,535 and the 10 per cent income tax band of £1,880 would have been used. This would result in an overall tax rate on the gain realised of 2.93 per cent.

The funds realised could be used by the child to pay for the annual costs whilst at university. More than £6,415 could actually be realised tax-efficiently as this figure only represents the gain.

The amount that could be realised depends, of course, on the length of time that the investment was in force before encashment and also the level of growth.

Should the investment remain in the hands of the parents then it may be that any growth, be it income or capital gain, could be taxed at 40 per cent – so the 2.93 per cent outlined above looks particularly attractive.


New exodus on way as Equitable cuts again

IFAs believe Equitable Life&#39s decision to slash terminal bonuses by 4 per cent will lead to a renewed exodus of policyholders despite the imposition of an increased market value adjuster of 14 per cent.They question Equitable&#39s rationale for the new restrictions, as a letter sent to policyholders claims the company&#39s position has improved. It says […]

Point One expands into healthcare

Bankhall owned support services provider Point One is expanding its range of services into healthcare covering PHI, PMI and group risk schemes.The provider panel for the new service includes Bupa, Norwich Union Healthcare, Unum, Swiss Life, PPP Healthcare and Standard Life Healthcare.Point One has also announced Scottish Widows is joining its list of protection providers.Head […]

Corporation tax

The Chancellor announced the following reduction in corporation tax rates effective from 1 April 2002 (i.e. retrospectively). The small companies&#39 rate of corporation tax has been reduced from 20% to 19%, and applies where a company has profits of between £50,001 and £300,000. Where a company&#39s profits do not exceed £10,000 there is a new […]

Mortgage Express five-year fixed

Mortgage Express five-year fixedFixed term: 3 June 2007Fixed rate: 6.24%Minimum loan: £40,000Maximum loan: £250,000 up to 105% LTV Income multiples: 3.25 x principal plus 1, 2.75 x jointArrangement fee: £325Redemption fee: Six months&#39 interest at fixed rate until 3 June 2005Conditions: Available for purchase only. 102% LTV limit for first-time buyers. Available through Pink Home […]

The curious market reaction to Brexit

Written by Mike Riddell29 June 2016 Headlines over the past few days have screamed about record falls in sterling, record low bond yields and massive falls in equity prices. However, if you take a slightly longer view of markets rather than simply the one- or two-day reaction, I think it’s amazing how little markets have […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm