Trusts are often thought of as something that only the very wealthy have need or use of, but there are several ways in which they can be of much wider use. One easily overlooked tax fact is that children are also taxpayers, with their own tax free allowances and basic rate tax bands. These are often wasted until the child leaves education.
Below is the first way in which a family trust can be beneficial to meet school fees for children under 18.
Grandparents providing assistance with Grandchildren’s school fees
We speak to clients who are helping their Children with the cost of Grandchildren’s school fees, often out of income that is being taxed at higher rates of income tax.
There are two typical types of income:
i) Rental income
ii) Dividend income
Where income is surplus to requirements, not only is the income being taxed at a higher rate but the underlying capital is also within the grandparents’ estates for inheritance tax.
Consider a rental worth £300,000 generating income of approximately £20,000 per year being contributed towards school fees of two grandchildren.
With income tax at 40%, this only leaves £12,000 available to pay towards school fees for grandchildren. The property itself could be subject to an inheritance tax charge of up to £120,000 if the nil rate band had been used elsewhere.
The property may be placed into trust for the benefit of the family of the grandparents. The income is paid to the Grandchildren, and because they have an entitlement to receive the income then it will be taxable upon the children.
If the Grandchildren don’t have any other income they are able to use their tax free personal allowances and basic rate tax bands.
So instead of using the after tax rents of £12,000 to pay the Grandchildren’s school fees there is after tax income of £19,776 by using the Trust, a huge difference.
And so long as the grandparents no longer need the property then the value transferred into trust starts to fall out of their taxable estate for inheritance tax after 3 years.
The position with dividend income can be even more favourable, as dividends up to the basic rate band (£35,000) are not subject to any additional tax, in addition to the tax free personal allowances.
Those grandparents who have shares, either in listed companies or in family businesses, that are surplus to their needs would be well placed to consider family trusts for their grandchildren!
A Trust can enable you to retain control over the property or shares (and income from it) by being a Trustee for your lifetime, to assist their Children at a time when they want them to have more income, and to pass on assets Tax efficiently.
Trusts can be very effective when combined with some simple planning to significantly reduce or eliminate tax liabilities. Whatever your situation we are pleased to provide advice and assistance.
Leanne is a Chartered Tax Adviser, specializing in advising on UK tax matters but also including overseas tax as needed. Leanne is head of Taxation Services at EHL Solicitors in Leicester.Talk to our legal team
The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.