Offshore bonds can help education costs
Financing education fees can be a challenge for many families,
particularly those whose children were born before 1st September
2002 and do not, therefore qualify for a Child Trust Fund.
University education is becoming very expensive and young
people from all but the wealthiest families can easily be
put off by the prospect of graduating with debts that could
easily exceed £22,000 if annual tuition fees of £3,000
and living expenses of £4,400 a year are taken into
account. This money has to be paid back, even though repayments
do not normally start until the graduate’s income exceeds
£15,000 a year.
The problem is that building up a significant fund can be
expensive and, if not handled correctly, can result in an
unfavourable tax position. For example, if money is invested
by a parent on behalf of his or her child, it is actually
treated as the parent’s income for tax purposes as soon
as the income exceeds £100 a year.
One solution, particularly where grandparents are able to
make a lump sum investment on behalf of the grandchild, can
be to use offshore bonds. In this way, once the grandchild
reaches 18 and requires money to cover his or her university
education, an income can be drawn from the fund.
If no more than 5% of the original investment is withdrawn
each year there will be no immediate tax liability. Instead
this is deferred until the bond is encashed or 100% of the
original investment has been withdrawn. Even if more than
5% is drawn as an income, it is unlikely that actual income
will exceed the personal allowance, provided the initial investment
was sufficiently large, say £50,000.
Say and income of £5,000 a year is taken. £2,500
will be “repayment of capital” and only £2,500
will be taken as income. Even if holiday earnings generate
a further £2,500 a year, total taxable income will be
less than the £5,035 personal allowance (for 2006/7)
for tax purposes.
If the bond is set up a number of years before it is required,
and no money is drawn in the intervening period, then the
5% not taken during each year that the bond exists can be
aggregated with the income later on, so that even less of
the “income” is potentially taxable.
And gains from offshore bonds are “top sliced”
for the assessment of tax in any event. This means that the
actual gain is divided by the number of years the investment
has been in place and then only the result added to the investor’s
income for the purposes of assessing what, if any, tax rate
will apply.
Of course, provided the donor lives seven years after making
the investment for the grandchild, the investment will not
attract inheritance tax.
Where can my clients go for help?
If you would like us to review any of your clients’
education cost or other investment arrangements, please contact
us.
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