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Don’t miss out on education trust tax benefits

15 May 2012

Setting up an educational trust can provide a tax efficient way of privately educating your children or providing for their university education says Adams & Remers but many parents have not heard of them and don’t know how to set them up.

Over the next few weeks parents across the country will be anxiously waiting to see if their child has been allocated a place at their chosen school. For those parents planning to educate their child privately, how they will pay for their child’s education and for a place at University is a key consideration. Many parents may turn to grandparents for help but what is the most tax efficient way of setting up an educational trust?

Figures published on 25 April 2012 from the Independent School Council 2012 Census, shows that private school pupil numbers are up by 0.1% at 508,472. Private school fees rose by 4.5% last year and average boarding fees per term are £8,780 and average day fees are £3,903 per term.

Rose Macfarlane solicitor at Adams & Remers comments: “An education trust is available to parents of a child up to the age of 25 who are or will be in full time education. Any funds not used for this purpose will revert back to the parent. What many parents don’t realise is that this can be a very tax efficient way of ring fencing funds so they are removed from their estate for inheritance tax planning or if there is a possibility of divorce in the future.”

“Funds within an education trust can be invested in a very wide range of investments and you can be a trustee. Income earned on the investments will be treated as yours for income tax purposes.

“The funds in an education trust are also subject to Pre Owned Asset Tax which is currently charged at 4.75% and there is a level of benefit of £5,000 below which there is not charge. The maximum you can have in an education trust without incurring a POAT charge is currently £105,000, assuming you have not used up your POAT allowance elsewhere.”

“Grandparents can also get involved if they wish, by settling up to their available nil rate band (max £325k currently) in a discretionary trust for grandchildren for such things as education, without incurring any immediate payment of inheritance tax. Such a trust doesn’t have quite the same tax advantages of the parents’ education trust, as it would take seven years for the gift to fall out of their estate for inheritance tax purposes, unlike the immediate effect of the Education Trust. However, if the child is in their care and not in the care of their parents they would be able to take advantage of the tax savings of the Education Trust as well.” Rose Macfarlane concludes: “This is can be a straightforward housekeeping exercise and reduces the size of your estate for tax purposes without you losing control of the funds.”


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