Educator Trusts

Each grandparent can put up to £325,000 (depending on the gifts made in the previous seven years) into a Discretionary ET, with no initial IHT charges.

While the gift will be treated as part of their estate for seven years, if they survive seven years, their tax-free allowance resets and the gift will no longer be part of their estate for IHT.

Making a payment into a Discretionary ET early on, rather than making payments towards school fees each term/year, increases the likelihood that the gift will not be taxable to IHT.

IHT is typically charged at 40%, so a gift of £325,000 can result in an IHT saving of £130,000.

While the trust will initially pay income tax at 39.75% (on dividends) or 45% (on all other income), payment of a grandchild's school fees will be for the benefit of that grandchild, which means the income will be taxed at the child's tax rate, and any overpaid tax can be reclaimed.

If the grandchild has no income of their own, the first £12,570 will be tax-free, with the next £37,770 taxed at 20%.

If a grandparent pays school fees directly and pays tax on their income, they will need a larger income to pay the same amount of school fees.

How about a Bare ET?

There is no limit on the amount you can put in a Bare ET. As long as you survive for seven years, there will be no IHT consequences.

The income will be taxed directly on the grandchild, meaning there is no need for any tax reclaims.

Once assets are gifted into trust, you will never be able to be able to benefit from them in the future, so you will need to ensure that you have sufficient assets to give away.

Trusts have ongoing compliance and reporting requirements, such as being registered with HMRC.

These are more demanding on Discretionary ETs than Bare ETs.

Someone will need to deal with these requirements, and if a professional is instructed, there will be costs for this.

These costs can be paid from the ET, however.

Depending on the capital growth of a Discretionary ET, there may be charges to IHT every ten years, at no more than 6% on anything over (typically) £325,000.