School Fees Planning – With Capital

The following strategy converts interest to capital gain and assumes an investor holds cash in deposit accounts; which receive a low risk, stable but taxable income.

Using an asset protection trust, an investor converts the interest payable on a deposit account, which would be taxable as income, to growth taxed as a capital gain… this reduces the investor’s liability to tax whilst simultaneously increasing the protection of the family’s wealth.

This a new approach to using trusts within school fees planning; which is particularly appropriate:

• Where parents hold significant amounts of cash on deposit - school fees might be funded from the income tax saved.

• Where grandparents have estates large enough to incur inheritance tax - school fees might be funded from IHT saved; together with an additional income and an additional legacy.

Structure

A Jersey Purpose Trust is established with a relatively modest sum of money, say £ 1,000.

You then invest in an Offshore Capital Investment Bond (OCIB), which is then exchanged for a contract to receive two schedules of capital payments from the Trust.

Schedule One - is a series of capital sums payable to you as the investor; which is written for a predetermined period. These payments are made annually with each payment locking into capital growth equivalent to any combination of the following:

• Retail Prices Index
• Nationwide index of UK house prices
• FTSE

On death, any payments outstanding will be valued and added to your IHTable estate.

Schedule Two - is a series of capital payments commencing at a predetermined but materially later date. The ownership of these payments is transferred to your selected beneficiaries by way of a gift. 

Loans

Whilst cash is in a deposit account you can draw it as a lump sum. Once the contract for payments has been bought from the Trust you no longer have this ability. If at a later date however, you need a lump sum you could apply to the Trustees for a loan of a lump sum, on commercial terms. If the loan remains outstanding on your death it would reduce the value of your estate to the extent of the debt.

Trust

On fulfilment of both payment schedules, assets remaining within the Trust’ will be used to fulfil the Trust’s purpose(s). The Trust’ Enforcer(s) can then decide whether to dissolve or continue with the Trust.

It is therefore, for the Trust’ Settlor to recommend (via a letter of wishes) which of the purposes of the trust they would like to benefit at this time.

• If the trust is dissolved and assets are distributed there is only a very modest charge to IHT (generally in the range of 0.025% – 4%) to pay.

• Alternatively, the trust can be maintained with assets within the trust continuing to enjoy the tax privileged environment.

Assets within the Trust are protected from imprudent decisions, financial complications arising from failed marriages of any potential beneficiaries and creditors.

Benefits

• A material part of both payment schedules is a tax-free return of capital; the remainder of each payment is taxable but may be offset by the Investor’s or PET recipient’s annual CGT allowance - thereafter it is taxed at 18% as opposed to 40%.

• A significant reduction in tax, which enables you to enjoy either a greater after tax return, or leave a greater legacy.

Disclose Of Tax Schemes To The Revenue

Some tax planning schemes need to be pre-disclosed to the Inland Revenue. This is not a tax planning scheme nor does it rely on the non-disclosure of any steps to the Revenue. It is the purchase of rights for capital payments from the trust on arms length commercial terms and as such it need not be disclosed.

Risks 

Information provided is based on our understanding of legislation and practice in force at the date of this email.  Whilst we believe our interpretation of current law and practice to be correct in these areas, we cannot be responsible for the effects of any future legislation or any change in interpretation or treatment.

Tax allowances depend on individual circumstances and tax rates and laws may change in the future.

Summary

This strategy reduces your liability to tax whilst simultaneously increasing the protection of your family’s wealth and ultimately, your legacy.