Funding Unversity costs Flashcards
3 points
What are the ways in which Tom could withdraw £120,000 from the £160,000 investment bond?
1 Tom can take a withdrawal across all the policy segments, any amount over the culmulative tax deferred allowance would generate an excess chargeable gain
* Take the maximum 5% culmulative tax deferred over 15 years, equating to £60,000, the excess from the £120,000 would be a chargeable gain
* Topslice = 60,000/15 years (as entered into15th policy year due to partial withdrawal from each segment) = £4000
2 * Encash 75 policy segments fully. £120,000/£1600= £75,000 segments
* Each segment is worth £1600, of which £800 is part of 5% tax deferred and £800 x 75 segments
* Topslice £60000/14 = £4285
* 3 * Fully surrender the bond - Current value £160,000 - orignal cost £80,000 = £80,000/14 complete years - 35714 Highest figure for topslicing
What are the cosequence of this action
8 poiints
Explain, in detail, how Tom could use his Onshore Investment Bond to
provide tax-efficient funds to support Amelia and Noah whilst they are at
university
- Assign whole segments of the bond to the children when they are 18 and starting UNI
- Assignment is not a a chargeble event for income tax
- Any income tax liability is passed to the children
- The children will have their own personal allowance/potentially no tax on encashment as they are studying and likely to be non taxpayers
- Tom will save income tax of 20%- the other 20% was deducted from the fund already
- The children could use 5% witax deferred income from the bond
- Withdrawals are cumulative and no withdrawals to date
- Top slicing relief can be used by both children
- Alternatively rather than assigning to children Tom could make withdrawals on an annual basis by keeping within 5% tax deferred income, without giving rise to income tax
What is the IHT impact of Tom’s mother’s gift
- At the same time gave Tom and his siblings £160,000 x 3 equals £48000 - all PETs
- Assuming no other gifts in the last 7 years, gifts over NRB of £325,000 by £149,000
- Tom’s liability is 1/3 (149,000/3 X40% = £19,866 if she dies within 1-3 years
- Liability until after June 2027
- Reduces 20% each year until fully exempt after June 2031
- Tom should consider gift intervivos 7 years LTA on his mother
- Dependent on her age and health
4 points
What is a gift inter vivos scheme
- A life policy designed to protect recepients of lifetime gifts from IHT
- IHT maybe due on lifetime gifts following the death of the donor within 7 years
- It is a decreasing term assurance that mirrors the taper relief
- Sum assured is level for 3 years then after reduces by 20% per year for the next 4 years
*
Features of educatonal trust
- Set up specifically for the education of Emelia and Noah
- Immediately outside Tom and Sally’s estate for IHT and not considered CLT
- Can be taxable on the children once they are 18 and use their personal allowance and marginal rate.
- Any funds left over after education can be returned to Tom and Sally
What options are there to fund the children’s university costs
- Children work and/or take out student loans
- Fund JISA/CTF
- Convert existing funds to generate income to support university costs when needed
- Use Tom’s investment bond and assign to children, 5 % tax deferral
- Use Trust/Educational Trusts
- Check if other family members could help contribute such as Tom’s mum or Sally’s sister
- Use surplus income
- Invest regular income or lump sum
- Ensure protection in place for this objective
6 points
CTF vs ISA
CTF
* Cant pay into JISA at same time
* Must pay CTF into JISA within 60 days of opening an ISA
* JISA interest rate higher
* Wider choice of JISA providers and funds
* Many CTF dont allow new investments
* Charges are higher
4 points
CTF vs JISA
- No government contribution
- Contribution period per tax year, CTF is per birth year
- Child can take control over JISA but not access money, cant do this with CTF
- Child cannot have more than one JISA at any time
9 points
Tom and Sally are considering the use of Junior ISAs for Amelia and Noah, especially as Sally has just had a significant increase in her earnings.
Explain, in detail, what a Junior ISA is and how Tom and Sally could utilise these to build up a lump sum for each of their children.
- Each child can have an ISA in their own name as they are under 18 and UK resident
- Can only have an ISA if they dont have a CTF, thought htis can be transferred to a JISA
- CTF avaialbe up until 2nd 2011 so depend on Noah’s DOB if he has a CTF
- Can be invested both cash and stocks and shares
- Returns are free from income and capital gains tax
- Withdrawals are tax free
- Not subject to £100 settlement rule, advantageous as Tom and Sally are higher rate tax payers
- A maximum of £9,000 can be made each tax year, per child
- Can be in cash or stocks and shares
- The children will be able to manage the account when they are 16 and help with understanding investments and decide on investment type
- Access to funds not allowed till 18 which would coincide with the age that the children would normally start uni
- At 18 the JISA is automatically rolled over to an adult ISA, not affect ISA allowance
- Anyone can contribute/fund them
- Range of funds avalable to suit ATR
- Shortfall risk applicable
Benefits and drawbacks of funding university via disctretionary trustBenefits and drawbacks of funding university via disctretionary trust
Benefits
* Education Trust not part of the estate for IHT and not considerd CLT
* Other type of discretionary trust, transfers into the trust would need to survive 7 years before out of the estate if NRB is exceeded
* Benefits from tapered IHT from year 3 onwards and completly outside of estate after 7 years
* Tom and Sally can retain a degree of when payments are made to the children Amelia and Noah
* Tom and Sally can be Trustees and add new Trustees such as family memeber or friends e.g Sally’s sister
* The have the flexibility of changing beneficiaries or adding additional ones in the future to account for ahving another child or grandchildren
* Tom and Sally can additonal funds later
* Allows for sucssion of generations to benefit
* Tom and Sally can allocate assets to beneficiaries when appropriate
* Can change aim of the Trust if children dont go to university can be use for other purposes
* Protect assets from creditors and bankruptcy
* Protect exploitation of vulnerable individual
Disadvantage
* Loss of access of capital and liquidity that could have been used for other needs and objectives.
* On the death of second spouse any amount over £325,0000 NRB within 3 years would form part of their estate
* Where NRB is exceeded transfer into discretionary trust subject to 20% lifetime transfer rate, liabile to periodic charges every 10 years at 6% and exit charges
* Trustees pay additioal higher rate tax on entire income in excess of £500 45% for income and 39.35% for dividend income
* Child settlement rules apply if children are under 18
* Administration can be complex and selected trustee may not have the skills or time to carry this out
* Appointing a professioanl trustee would cost
Process and consideration when setting up a discretionary trust
Considerations
* Tom and Sally would select the Trustees
- at least two but no more than four, for ease of decision making
- Tom and Sally could be two of the Trustees to allow them to retain control over distribution of assets to the children
- They can appoint family members or alternatively professional trustees. This is at a cost.
* Tom and Sally would define the potential beneficiaries of the Trust
- They can include a calss of beneficiaries to allow for unborn children and grandchildren
- Should not include themselves to avoid IHT liability and gift with reservation implications
* Tom and Sally as settors would decide how the assets in the Trust can be used via the Trust deed
* They can create a letter of wishes, setting out how they wish the trustees to deal with the trust assets
* Trust is registered with HMRC
* As this is the first trust then full Trust CGT exemption of ££1500
* If income below £500 no income tax to pay
Why would holding the investment bond within a trust help Tom and Sally’s financial objective
- Tom can assign his investment bond into trust without triggering a chargeable event and so no tax payable on transfer
- Trust will acquire the bond at its original value of £80,000, date mother made the investment and gives access to unused 5% tax deffered withdrawals
- Tom and Sally can use 5% tax deferred - tax withdrawal feature to allocate money to the children to help meet costs incurred during university and not create a chargeable event
- The money left is left to grow and helps mitigate the parental settlement rule
- The investment bond will allow Tom and Sally as Trustees hold an investment in diversified manner with potential for growth
- Investment bonds dont produce an income., so there is no income tax charge unless theres a chargeable event
- Growth is immediately outside their estate for the purposes of IHT
- Tom and Sally has a IHT issue, so putting this into trust will mitigate the liablity, viewed as CLT and outside of estate after 7 years
- As both in good health and no family history of health issues its likely they will survive 7 years
- Trust does not end when the children are 18 and so can be used for other life events
Explain in detail how Tom could use his onshore investment bond to provide tax-efficient funds to support Amelia and Noah with educational costs in the future when at university
- Whole segments of the bond should be assigned to the children
- This would not be a chargeable event
- They would be PETs for IHT purposes
- The tax liability will pass onto the children
- While in uni they are likely to be non tax payers and no longer minor children
- Avoid implications of parental settlement rules
- Chidlren will have their own personal allowance which can be offset against any chargeable gain
- This would save Tom a potential income tax liability of 40% as a higher rate tax payer
- The bond was openend in June 210 and original investment was £80,000 x 5% withdrawal x 15 years equals £60,000 culmulative that can be taken without immediate tax charge. By 20 years full £80,000 can be taken using 5 % culmulative withdrawal
- This would be fully available by the time Noah starts uni less any withdrawals made for Ameila
- Top slicing can be claimed if chargeable event occurs
- Potentially saving Tom 40% income tax
- No IHT if Tom survives 7 years
Explain how Tom can transfer his existing onshore investment bond into a suitable trust to be able to provide tax-efficient benefits for his children and any future grandchildren.
- He can set up a discretionary trust
- Any transfer in would be a chargeable lifetime transfer as it is a relevant property trust.
- Assuming no previous transfers have been made, there would be no immediate tax charge as the value of the bond at £160,000 is below the current nil rate band for IHT.
- The transfer would be outside of Tom’s estate after 7 years, which would help their IHT situation.
Tom can use his annual gift exemption for this year, and last year if not already used. - The trust could be subject to periodic or exit charges, but this is unlikely given the amount being transferred in.
- Tom and any other trustees he appoints retain control of the assets.
- There is flexibility of beneficiaries, so he can change the potential beneficiaries to include future children or grandchildren.
- The transfer into the trust is not for money’s worth, so is not a chargeable event. This also means that there are no income tax charges for Tom.
- The investment bond is a non-income producing asset, so won’t incur tax charges within the fund.
- This makes the administration of the trust easier for the trustees. As there is no income to declare, no tax return will be required.
