University Fees Planning Briefcase
University Fees Planning Briefcase
The challenge
- To maximise investment choice and potential
- To minimise any tax liability during the investment and on cashing in
- To ensure flexible access when needed
The offshore bond solution
- Parent or grandparent invests in an International Prudence Bond
- Bond is put into an absolute gift trust - no inheritance tax if the donor survives for seven years
- When the money is needed, the trustees can cash in the bond - income tax will be assessed on the beneficiary
- Alternatively, they can assign the bond to the student
- Tax liability now falls on the student, who is a non-taxpayer
- Student takes partial withdrawals to fund studies - these may be covered by the 5% tax-deferred allowance, personal allowance or a combination of both, meaning no income tax will be payable at the time
What are the advantages?
- No tax except withholding tax paid within funds - onshore bonds have tax deducted at source which cannot be reclaimed
- Investment strategy not constrained by income considerations; UK collective would incur tax on income - see the difference
- No capital gains tax on switches between funds
- 5% tax-deferred allowance enables withdrawals without immediate tax
- Assignment facility offers the potential for further tax-efficiency when benefits are distributed
Offshore bonds v collectives: the effect of ongoing tax
Many UK collective funds are likely to have an element of interest or dividends within the overall return, even where they primarily target capital growth. Interest arising will be taxed at 20% within the fund and 40% taxpayers will be liable for a further 20%. Income from dividends will be taxed at an effective rate of 25% in the hands of a 40% taxpayer.
Because the tax is payable year on year, it acts as a curb on growth, compared with the gross roll-up applying on an offshore bond. The table below shows the effect.
Example
Investment: £200,000
Total net growth rate: 5% p.a.
40% taxpayer
Ongoing values after 5 years
| With interest/dividend element of*: | |||
| 2% | 2.5% | 3% | |
| Collective - income from interest | £245,679 | £243,331 | £241,000 |
| Collective - income from dividends | £249,236 | £247,749 | £246,269 |
| Offshore bond | £255,256 | £255,256 | £255,256 |
*For the collectives, figures assume the interest or dividends are reinvested and money is withdrawn to pay the higher rate tax due. For the bond, it is assumed no withdrawals are made. All figures ignore any product charges.
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Tools & calculators
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Related links
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- Download sample client approach material
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