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Rebecca Williams, client director at wealth manager Brown Shipley, explains why bare trusts can be a useful option for grandparents wishing to help fund their grandchildren’s education and how bare trusts enable clients to achieve their goals in supporting the next generation’s educational needs.
Many parents highly value the ability to privately educate their children, but the ever-increasing costs can prove hugely expensive over the years.
Parents can expect to pay approximately £275,000 (assuming costs of £15,000 per child per annum inflating by 4% from age 4 to 18) for a private education for a single child from four to 18 years old, with this price increasing significantly if the child is boarding. Children that do not go to a private school, but go on to university can also build up significant debt from a combination of tuition fees and living costs over the duration of their studies.
This is often where grandparents come in, as many are keen to help with the cost of education for their grandchildren and may already be paying school or university fees directly out of their own income or investments.
However, there is an effective alternative worth considering in such cases – the bare trust.
Tax friendly trust
The word ‘trust’ can ring alarm bells. They are often regarded as complex, costly and involving considerable ongoing administration.
However, a bare trust is more like a nominee arrangement than a conventional trust. A grandparent can open an investment account designated for their grandchild with a gift and the account will act as a default bare trust. This account can then pay school or university fees directly.
The big advantage of a bare trust is their tax treatment. The money inside a bare trust is treated as if it belongs to the child for tax purposes. Grandchildren can use their own personal income tax allowance, personal savings allowance, capital gains tax exemption and dividend allowance each year in such cases.
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