Tax-efficient University Savings

Students matriculating in September 2011 in England and Wales will be part of the last year to benefit from the current university and college course charging structure. The well publicised rises in university and college tuition fees means that assuming modest inflation of 2.5%, the same student starting university or college in 2020 could need around £54,500 to fund a 3 year course.

What are the options?

There are several options available to cover the costs of further education. Some individuals may be best advised to take the Government loan, where there’s no need to pay costs in advance, and as repayment is based upon future income levels it may be the cheapest and most effective option. Others, who may prefer to avoid the thought of debt, may choose to pre-fund the costs by making arrangements now. For these students, their parents and grandparents who want to fund further education up front – or at least contribute to easing the burden of student debt and the interest on top of this combined with a Government loan – offshore bonds can provide a particularly flexible and tax efficient method of helping fund the spiralling costs of further education. You retain access and control whilst your children are young. Later on the bond can be used to meet further education fees in a way that is likely to be advantageous for both income tax and IHT. This can all be achieved without the need for a trust.

Parents could take out an offshore bond whilst their children are still relatively young. This will give the bond plenty of time to grow in a tax-free (other than any non-recoverable withholding taxes) environment. The parents still have access to their capital should they require it as no trust has been used. They are also able to take 5% per annum of the original investment with no immediate tax liability. This may be a useful way of drawing money to pay for the private education of the children prior to university, whilst they are still minors.

But what if either or both parents are higher rate taxpayers? Will the bond gains not be subject to higher rate tax when they come to use it to help with university fees? This is where the offshore bond comes into its own. Once the children reach 18 bond segments can be assigned to them. The assignment will not be a ‘chargeable event’ and any subsequent chargeable event will be assessed on the assignee who, as a student, may well be a non-taxpayer. This means that any unused personal allowance can be set against the offshore bond gain followed by the 10% band and the tax bill significantly reduced.

There is also an inheritance tax advantage to this strategy. You might think that the assignment of bond segments from the parents to their adult children are potentially exempt transfers and will not become exempt for seven years. In fact it is likely to be immediately outside the parents’ estates as the transfer is for the education and maintenance of their own children whilst in full time education.

Duncan R Glassey
Senior Partner – Wealthflow LLP

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.