More on Education

Often a child's grandparents may be major contributors to a school fee plan, and here capital transfer tax can be a problem. The simplest method, where the grandparents wish to give an annual sum, is for them to use the £12,000 p.a. individual exemption from CTT to pass on an annual sum to the child's parents.

They in turn can use it to fund a series of policies as described in Example 11. If the period until schooling begins is shorter than that shown there, and endowment policies cannot be used, then the parents should avoid investing any of their own money on the child's behalf, because if it is invested by the parents the income derived from the investment will be aggregated with the parents' own income for tax purposes and income tax will be payable. If the parents do have capital (or the grandparents are providing it) a trust may be set up into which money is paid.

This educational trust then purchases a series of deferred annuities (see Section 10) payable not to the parents or the child but to a school (which does not have to be named until shortly before schooling begins). This method is especially suitable for those paying high rates of income tax, for whom the net returns can be substantial.

These trusts are quite different from the trusts constituted under the Married Women's Property Act (MWPA) which are normally used to ensure that the proceeds of a policy designed to benefit children actually reach them free of tax. In this case the policy is written under trust and the contract contains the stipulation that the policy proceeds are to be payable to either the wife alone, to the wife and children, to the children alone, or to an individually named child or children. Normally the husband and wife are named as the trustees, thus maintaining some control over the disposition of the proceeds. However, once the trust has been constituted, it may not be altered without the consent of those named as beneficiaries, and a child may not give its consent until reaching the age of majority (18).

Thus, the use of the MWPA provisions for educational endowments does mean an irrevocable commitment of the proceeds to the child(ren) and this may not be desired by some parents. The main advantage of the procedure is that, if the policyholder (usually the father) dies, the proceeds of the policy will be immediately available to the wife and children and no CTT will be payable.

The MWPA type of policy is also a useful method of providing a sum for a child, say, at the age of majority or on marriage.

Provided the wording of the trust allows this, the trustees can have the power to make the policy paid-up, to surrender it or otherwise dispose of it as they wish, so long as the proceeds are still for the child's benefit.

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One popular use of endowment policies is in connection with private education. The rise in school fees in recent years has marched along with inflation, and few parents can now afford fees for more than one child out of current income. Increasingly, therefore, advance provision through the use of endowments is made to ensure that funds will be available during the school years.

The normal way is for the parent(s) to take out a policy or series of policies on their own life or lives, taking loans against the surrender value for any fees required in the first 10 years and meeting fees thereafter... see: Education

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