Education Trust for DD from grandmother - some initial questions

[IolIy]

I am going to book an appointment with a solicitor next week but I have some initial questions. DMIL would like to set up a trust of around £80-90k to pay DD’s primary school fees in the future. I would be the person managing it. It would be a discretionary trust.

I read that I might have to pay income tax on the payments - is that right? I am a higher rate taxpayer but DH is lower rate. Shall we put him as a trustee too?

Do you have to pay an annual management fee with all trusts? I saw this can be £1000s a year which isn’t really worth it x10 years. Is there any way to get round it?

Are there any key things we need to think about before we see the solicitor?

Thank you!

Hopeful bump

does you mother intend to add to that amount? When will your daughter be starting private school?

£90 isn’t going to pay for many years of schooling.

Average fees for independent schools are around £15k, so £90k would be 6 years of school (ignoring any price increases, but also ignoring any income the trust will generate).

@IolIy - You may find this useful re tax - Use a trust to pay for your grandchildren’s school fees and save tax.

Regarding management fees, that depends on who manages the trust. If you are managing it yourself without any professional advice, there would be no management fees.

I knew I’d get a comment on the amount! It will be sufficient for the school we have identified 😊

Thank you ☺️

you mention primary school fees, if your little one is young perhaps consider if you were to have another child and DMIL had passed, would you need a clause about how the money is split in that instance? even if you aren't planning anymore its worth thinking about what you'd do if you changed your mind or had a 'surprise' baby

Discretionary trusts are taxed at 45% for income and this will require registration with TRS and tax returns every year. There are also periodic charges. It’s not for the feint hearted and super unlikely to be able to be dealt with by lay people, most accountants would be a bit lost.

For the sake of £90k I’d chance a gift to you if I were her.

Bearing in mind ours school fees gone form £12k a year to £19k a year in three years. I’d like to know where you can get a primary education for £90k !

So what is that 45% taxed on?

The more I’ve read, the more I’m considering Junior ISA, premium bonds etc. But it’s so frustrating because there will be gift/IHT implications.

The rich stay rich because they understand things like this and tax loopholes etc!

I think it’s not going to be best for such a moderate amount of money, when will your DD start the school? Are you confident the school is financially in a strong place? If so what if the fees are simply paid up front to the school. It does mean your DMiL and you lose all control of the money and you can’t use it to control.

I have some experience with trusts. I think thr first question is why woukd you want to put it in a discretionay trust, rather than directly in her name via a bare trust? A discretionary trust has lots of costs / tax associated with it that a bare trust would not. As she is a child it is not like giving £90k to a teenager who might run off and spend it on drugs, which is why you might want to retain control.

Honestly @Bumbers - we don't know the first thing about trusts or really what the difference is between them. I've tried to Google but the information feels complex and overwhelming. Essentially, there is a pot of money which she wants to transfer to our DD for her future education. She doesn't want it to be taxed at 40% or anything like that. Just the best, tax-efficient way to transfer £80k or so and have it there for future school fees.

I would be grateful for any and all suggestions!

"She doesn't want it to be taxed at 40% or anything like that."

That figure relates to any income earned by the trust (eg interest or dividends on shares etc), however the figure is actually 45%, not 40%.

But the good news is that your DD can reclaim that.

It's rather complicated but the process is that where a trust earns more than £500 a year then it must pay 45% tax on interest and 39.35% tax on dividend income.

If that income is then distributed to your DD she will get the money net of income tax and a tax credit (form R185). At the end of the year your DD will then need to apply to HMRC for a tax refund (well, obviously, it will be you doing all this on her behalf).

So, as long as your DD does not currently have an income then she will be able to reclaim the tax that the trust had to pay on it's income.

This is correct and is why it is dangerous to listen to internet randoms who may only have a partial idea of how things work. Yes, the trust may pay a high rate of tax on any income, but it is irrelevant because your daughter will be able to claim it back.

It depends very much on where you are. A prep school near where I grew up in London charges around £21k per year. Even if you got a very good return on investing the £90k, it is unlikely to be enough to get you through this school.

A prep school in the north west, near where I currently live, charges just over £11k per year (or just under £12k if you pay for lunch). £90k should get you through this school comfortably.

Worth noting if she just decided to pay the fees and then passed away with a taxable estate then the 7 years to come out of your estate does not necessarily play out as there can be a 14 years ‘backward shadow’ if you pay out for the benefit of someone else who does not receive directly.

This area of law and tax is super complicated and unless she really doesn’t trust you I’d advise a straight gift to you.