In light of the rising cost of school and university education, arguably the most effective way that a grandparent can help their grandchildren (and by default their children) is by providing financial support.
Doing so can also be supremely tax efficient.
The most important fact to establish at the outset is the affordability of the gift for the grandparents. Only after potential future care costs have been considered should a decision be made to ringfence a certain amount of money to provide financial support for education of grandchildren.
Option 1: Grandparent ringfences an amount of money but retains control of it, paying it out to cover school or university fees as required
The main advantage of this approach is that the grandparent only has to hand out one year (or one term’s) educational fees at any time, allowing them to contribute as much or as little as they want in any year.
The main disadvantage of this approach is that if the grandparent(s) dies within 7 years of the date of the gift it is added back to the grandparent’s estate for inheritance tax purposes (unless the gift is covered by one of the limited inheritance tax exemptions). Therefore, the grandparent(s) would need to survive 7 years from the date of the last payment in order to avoid inheritance tax. For example, if annual gifts of school/university fees were made over a 14 year period, then the grandparents would need to survive 21 years from the date of the first gift in order to ensure that no inheritance tax was payable on the gifts.
Option 2: Grandparent makes an outright gift to the grandchild using what is called a ‘bare trust’: school/university fees are then paid from the trust. The grandparents or the parents can choose to be the trustees of the trust so that they have control over the payments.
The advantages of this approach are that:
- Any income derived from the money gifted into the bare trust is taxed on the grandchild. The grandchild will have their annual personal income tax and capital gains tax allowances available to use up each year which is likely to mean that no income or gains tax is payable.
- If the grandparent(s) making the gift survive 7 years from the date of the gift then it falls out of their estate for inheritance tax purposes.
- Any money left over after paying for school or university fees can be used by the grandchildren to get a foot on the property ladder.
The key disadvantage of this approach is that the grandchild is legally entitled to the bare trust money at age 18. However, with the grandchild’s consent, the grandparent can continue to be a trustee beyond this age and whilst there is always a risk of a delinquent grandchild upsetting the apple cart, we have, at RG, never had any experience of a grandchild doing so. If, though, this is a major concern, another form of trust, called a discretionary trust, can be used instead. It is not as tax efficient as a bare trust but gives greater control to the trustees.