Although efforts to deal with Covid-19 are starting to bear fruit, the prospects for a return to normality in education are still uncertain at best. In this climate parents and other family members may want to provide additional support to children whose education risks being disrupted or otherwise hindered.
Where minors (children under 18) are concerned the options for parents are severely limited by the UK’s stringent settlement anti-avoidance rules. Many people think of settlements as meaning trusts but for tax purposes a ‘settlement’ means “any disposition, trust, covenant, agreement, arrangement or transfer of assets”. So a settlement can even include an outright gift from a parent to their child, e.g. of shares that produce dividends or cash in an investment account. There is an exception for the first £100 of the child’s income from the parental settlement but that is it as far as meeting current requirements is concerned.
Parents who want to look ahead can put money into funds that will mature when the child reaches 18, providing funds for further education. But these are beset by difficulties because the settlor must usually completely excluded from ever receiving any benefit out of the property that they settle, so careful structuring and forethought are required.
Beware of the ‘boy/girl racer’ problem
Once a child reaches the age of 18, outright gifts become an option. However to be effective, gifts need to be irrevocable and you may not know for sure how a teenager will respond when presented with a substantial amount of cash and deciding whether to fund food and fees or a flash set of wheels. So even then, a trust may still be a good idea to retain some control over where the money goes and turn off the money taps if necessary.
Grandparents, uncles and aunts
Non-parents have free rein when it comes to funding younger relatives’ education. Although they must effectively remove their endowments from their estates for good as they too can still retain some control through the use of trusts. Those who are looking to save inheritance tax may find this is a good time to look to pass wealth down for the benefit of future generations, saving 40% IHT at the same time.
If you would like any further information on how we at Signature Tax can help, please get in touch with your usual contact or on the details below.