School Fees Planning – With Your Home

The following strategy assumes a grandparent(s) would like to help with school fees and has an estate that would otherwise incur Inheritance Tax (IHT).  This approach converts a potential inheritance tax liability into school fees.

This approach to using trusts within school fees planning is appropriate where grandparents have estates large enough to incur inheritance tax.

Example - a couple aged M68 & F65 have an estate valued at £1.25M and a life expectancy of 16 & 22 yrs respectively.

They could fund £ 140,000 of school fees; whilst simultaneously increasing the protection of their family’s wealth and ultimately increase their legacy by £ 130,000.

Structure

• A Jersey Purpose Trust is established with a relatively modest sum.

• A lifetime mortgage is arranged, which provides a facility to draw down capital as a lump sum and/or a regular cash flow. This can be use to provide an additional income and/or private school fees.

• The grandparent’s home is then sold to a trust with the lifetime mortgage undisturbed; and their retaining the right to occupy their home for the rest of their life(s).

• The selling price of the home is discounted to reflect the grandparent’s retained interest in the property; and is used to acquire a schedule of capital payments from the trust.

• Stamp duty is payable by the trust, on the discounted value of the property. The discounted value will often fall below the stamp duty threshold.

Schedule One - is a series of capital sums payable to the investor; for a predetermined period. However, there will be no schedule one payments from the trust, unless other assets are included within the planning.

Schedule Two - is a series of capital payments commencing at a predetermined but materially later date. The ownership of these payments is transferred from the grandparents to selected beneficiaries by way of a gift. The gift is a Potentially Exempt Transfer (PET) of assets from the grandparent’s estate; which becomes exempt from IHT if they live for seven years after the date of the gift.

Trust

On fulfilment of both payment schedules, assets remaining within the Trust’ will be used to fulfil the Trust’s purpose(s), which might include payments to the extended family. 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.

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 Of Benefits

This strategy:

• Funds school fees; together with a tax free top up income and ultimately, increases your legacy.

• The property is now owned by the trust; where it is protected from creditors and care funding.

• The trust can be onshore or offshore; however, if it is invested offshore it accumulates tax-free in a highly regulated environment.

• It is likely that the payment of benefits can be enjoyed by the PET recipients entirely free of Income and Capital Gains tax.

• After your death assets within the Trust are protected from imprudent decisions, creditors and the ravages of divorce of the potential recipients.