"We want to pay our grandchildren's school fees and limit IHT"
Ask an expert: a couple in their 70s want to pay for grandchildren’s education and limit inheritance tax.
A married couple in their late 70s have already given significant capital to their daughter. They now want to make provision for their two grandchildren, including meeting private school fees and potential university costs. They are keen to maintain control of the remainder of the assets, while limiting their inheritance tax liability. They want as much of their estate as possible to be passed to their family when they have both died.
Cazenove Capital’s solution:
We advised the clients to establish bare trusts for each of their grandchildren, settling £200,000 in each. This money is invested in a long-term portfolio. The gifts are “potentially exempt transfers” (PETs), which means that provided the grandparents survive seven years, the money falls outside of the estate and will no longer attract inheritance tax. The bare trust is a common structure, giving the grandchildren entitlement to the funds at age 18. While they are minors the funds can be used towards payment of school fees and related educational costs. As the gifts have been made by grandparents, the “parental settlor” rules do not apply and so each of the children’s personal allowances (£12,570 for 2021/22) for income tax and capital gains tax allowances (£12,300 for 2021/22) can be used every tax year. This will allow the funds to be managed using tax efficient allowances where available.
We also advised the clients to invest 100% of their ISA investments (totalling £500,000) into a portfolio of Alternative Investment Market (AIM) shares. The Cazenove IHT Portfolio Service, involves investing in shares which qualify for Business Relief, meaning they are exempt from inheritance tax provided the investor owns them until death and for a minimum of two years. These investments are often in smaller companies, which can result in more abrupt price movements and volatility.
In this scenario – by settling £400,000 into the two bare trusts and £500,000 into the IHT Portfolio Service, the clients have reduced their potential inheritance tax liability by £360,000, leaving more of the estate to beneficiaries on their deaths.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.