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06 June 2024

As costs for education continue to increase, transferring wealth between generations can be a good solution for funding school and university fees.

We often work with clients seeking to leave a legacy for their families, and one of the ways they like to do this is by helping to fund education for their grandchildren.

While intergenerational wealth transfer can be a mutually beneficial and tax-efficient way to help with this goal, it may not be suitable for everyone. This is especially true for those who can pay fees out of their net income, as making financial gifts can create additional tax for both the patron (e.g., the grandparent) and the recipient (e.g., the parent or grandchild).

In this blog post, we will discuss key points to consider when transferring wealth to fund education, including building appropriate flexibility into financial arrangements, understanding tax implications and gifting at the most suitable time.

Please note: some of the ideas in this blog post involve an element of investing. As is the nature with investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings. In addition, the ideas set out in this blog post are based on our current understanding of UK legislation, impacting only those within the UK tax system.

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Building in flexibility

The most important place to start when developing a financial plan is to ensure you have a clear understanding of your circumstances and requirements. You will then need to consider how much flexibility to build into your financial arrangements. For example, the giver should consider:

  • who will require access to the funds (e.g., the parent, grandchild, or both)
  • how often the giver will need to withdraw funds from this wealth
  • any age restrictions on when they can access the funds

Asking these types of questions helps to establish the most suitable strategy to achieve these goals, as the way you manage the wealth, both before and after funds are transferred to the donee, will have implications for how much tax is payable. Other options for freeing up capital to fund school and university fees could include bare trusts and offshore bonds, but these can be expensive and complex.

Understanding tax implications

Inheritance Tax is often a concern for later life, as tax of 40% is usually payable* on estates with a value of over £325,000 at the point when someone dies. Gifts given up to seven years before death may also be taxed at 40%, with a lower rate payable on gifts made earlier in this period, making it mutually beneficial for a donor to make a gift earlier to both reduce the value of their estate and to leave a generous gift for future generations.

In addition to transferring wealth tax-efficiently, families should be careful to ensure this will be received in a tax-efficient way to prevent additional tax being payable as a result of making the gift. Solutions could include using tax wrappers like ISAs or services like our Gilt Saver, which provides an opportunity to generate returns on savings over the short term through investing in government bonds.

Knowing when to gift

Starting to save as soon as you can is usually the best course of action to achieve your financial goals, however, the tax rules around gifts made in the seven years before death, mean that sometimes it is better to wait for a time before transferring your wealth. It is also necessary to assess whether you can afford to make the gift and sustain enough income in the years that follow, should you need to fund costs for long-term care or other large expenses.

If your family’s circumstances mean you need to review financial arrangements earlier, a more suitable option may be to invest a lump sum with the aim of generating a return or income for when you need it in the future. Further, making one-off gifts and gifting out of excess income can help reduce the value of your estate and consequently reduce the amount of tax payable – provided you make them at the right time.

More ways we can help with financial planning

Wealth transfer can offer a mutually beneficial and tax-efficient way for a gifter to help fund education. However, you should carefully consider how and when the gift should be made, and we have only provided general guidance in this blog post. The actual impact on your financial arrangements will vary based on individual circumstances, and a financial plan will require regular reviews to respond to changes in expenditure (e.g., increases in school and university fees) and updates to tax legislation.

Engaging a Wealth Planner well ahead of when you need to make the gift can help with navigating these changes, and our Wealth Planning Service may also be able to help identify further opportunities to make the most of your money**. Alternatively, you may like to consider our integrated Wealth Management solution across planning and investing, as we believe working with a Wealth or Financial Planner is the most effective way to make your finances go further.

For personalised advice on structuring your finances, speak to an Adviser.

* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.

Funding Education University Graduation