Investment Planning Strategies for Children & Grandchildren
With the increasing costs of higher education and the seemingly virtually impossible but at the very least difficult challenge of funding a deposit for ‘first home’ purchase, today’s young population have many difficult challenges ahead of them.
Some key facts in relation to the challenges:
- The current average level of the tuition fees at UK Universities is £3,375 per year.
- That cost is going to increase to up to £9,000 per year.
- At present the conservative estimate of a university education is in the order of £10,000. If the total cost of obtaining a degree rises to around £40,000, then in 18 years at, say, 3% per annum inflation, the cost will have risen to £68,000(i).
- The average current student will leave university with a debt of £25,000(ii).
- The average deposit required for the purchase of a typical first home in the UK is £31,500 (at the end of 2010).
There is no escape from the fact that the earlier the challenge is considered, addressed and savings started, the greater the chance there is of meeting what can be a very demanding financial goal. Careful investment portfolio selection and management will be essential, regardless of whether regular or lump sum/one-off savings programmes are entered into. The following ideas and options should help that planning:
- Effected by parent/grandparent and held in their name thereby retaining full control
- Invest up to £10,680 pa (2011/12)
- Tax free gains and income
- Remains part of the investor’s estate for IHT
- Funds available when required Junior ISA
- Available (expected) autumn 2011
- Up to £3,000 per annum invested
- Tax free gains and income
- Held in name of the child, therefore automatically available to them at age 18
- Not part of parent/grandparent’s estate on death
Funds held in Bare Trust
- Income is assessed on the child up to the personal allowance unless the parent is the settlor, in which case income is assessed on parent if in excess of £100 gross pa
- Capital gains are assessed on child so up to £10,600 of gains can be tax free every year (regardless of settlor)
- Child has the absolute right to capital at age 18
- Parent/grandparent trustee(s) have control over funds until age 18
- Investments will usually be Potentially Exempt Transfers (PET) for IHT purposes, therefore no potential IHT liability unless death occurs within 7 years Funds held in Discretionary Trust
- Greater control and flexibility over when and who benefits from the trust
- Income assessed on the trustees but taxed on the child if paid or applied for their benefit (or on the parent if the parent is settlor)
- Capital gains assessed on the trustees at 28% – £5,300 annual gain normally tax free (2011/12)
- Investments will usually be a Chargeable Lifetime Transfer but will only suffer immediate IHT if above the nil rate band (£325,000 for 2011/12) Offshore bond
- Effected by parent/grandparent and held by them
- Full control and/or access for the investor
- Potential for tax-free gains and income roll-up
- Remains in investor’s estate for IHT purposes
- Segments can be assigned to the child/grandchild once 18 or over for them to encash to minimise tax implications (gains are assessable to Income Tax)
Although providing financial support for children is an ever increasing problem, the above strategies can provide effective solutions. At Fiducia we use scenario analysis to establish the goals in terms of capital required, timescale and to take into account assumptions on investment growth and inflation. The resulting report provides the basis on which the appropriate savings or investment solution is built. Our proactive management ensures that the strategy is reviewed at least annually to ensure the objectives continue to be met, or adjustments made if appropriate. We would of course be happy to discuss the above strategies in greater detail.