Tax Savvy Education Trusts
Author: William Edwards
For parents who are concerned about Inheritance Tax (IHT) following their own deaths, education trusts are a tax efficient means of both financing their children’s education and reducing the value of their estate for IHT purposes.
Education trusts enable parents to put aside money to cover the education costs for each of their children. Expenditure for aspects such as school fees, school uniforms, school extra-curricular clubs, university tuition fees and university accommodation can all be saved for in an education trust.
Inheritance Tax Savvy
Unlike other gifts or savings, education trusts are not classified as part of a parent’s estate and do not affect that person’s £325,000 nil rate band allowance for IHT purposes. If you are looking to leave an estate over the nil rate band, it can make sense to use an education trust to reduce your estate’s IHT liability.
Parents can either deposit a lump sum into the trust or invest in it incrementally over time. As the trust is viewed by HMRC as immediately outside the parent’s estate from the date it is created, education trusts also aren’t affected by the seven year rules on giving gifts to children.
Peace of Mind
This means that, if you die, your children’s education can be safeguarded. The trust can also help reduce any burden on your spouse to finance the child’s education after your death.
Frequently Asked Questions
When can I set an education trust up?
You can set up an education trust any time before your child leaves full-time education.
How many trusts can I set up?
You can set up one trust per child. Siblings would need to have a trust set up for each of them.
Is the trust taxable?
Any income which the trust accrues from investments/interest is treated as belonging to the parent and is taxed accordingly to their current income tax rate. The trustees of the trust, who may be the parents, would be liable for Capital Gains Tax (currently at 28%), but this would come out of the trust’s funds.
Is there a limit to how much you can invest in the trust?
There is no limit but you should invest an amount that reasonably covers the child’s anticipated education costs. Any funds not used for financing their education are returned to the parent when the child completes their final studies.
When can you withdraw funds from the Trust?
You can withdraw funds at any time to cover education-related bills, such as school fee payments.
To find out more about education trusts or other tax efficient giving in relation to your estate and personal circumstances, please contact William Edwards either by telephone on 01483 411529 or email: firstname.lastname@example.org.