Offshore Bonds for Educational Funding
Colin Thores – European Product Development Manager
October 2009
This presentation is intended for qualified financial advisers only and must not be relied upon by anyone else.
© 2009 Standard Life International
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Funding university fees
Leeds
York
Imperial
College
Durham
Page 2
How much will university cost?
•Two types of costs in higher education are:
Tuition fees
Accommodation and day-to-day living expenses
•Full time students
Course started in or after September 2006 – maximum annual tuition
fees can be charged for 2009/2010 is £3,225*
* Source: Direct.gov.uk
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Why Fund University Costs?
•Student debt is more than £5,000 for each year of study
•September 09 starts expected to owe £20,000+ by graduation
•Push.co.uk survey Aug 09
•9.6% rise in debt levels
•Avg debt in England £5,563 p.a.
•Avg debt across all years
£14,000
•(at 6 universities it is £25,000+)
Source - Push.co.uk survey Aug 09
Page 4
University is expensive
Page 5
How big is this market?
•Secondary research from Mintel shows that this is a large and growing market
8 million adults in the UK regularly saving for children and a further 5 million
saving occasionally.
The top reason parents are saving is for university
Page 6
Funding University Costs
•An offshore Bond investment can be used to make a gift to individuals and
save income Income Tax and Inheritance Tax
•Use of assignment rules
•Utilise policy segments
Page 7
Making a gift - university costs planning
Assignment
• Higher-rate taxpayer assigns offshore bond to non-taxpayer or basic-rate
taxpayer e.g. spouse, children
• New owner cashes in – taxed at new owner’s rates
• Drip-feed over time to maximise opportunity
• Result – less tax than if original owner cashed in
Making a gift : don’t waste family tax allowances
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Assignment rules
•
•
Legal ownership can be transferred directly to another person
If gift (rather than for money’s worth) not chargeable event
•Assessed on subsequent chargeable gains arising
•Treated as having owned the bond since outset
•Partial encashment - entitled to top-slicing relief
•Full encashment - gain calculated as if always owned
•Withdrawals by donor prior to assignment taken into account when donee encashes
bond
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Assignment for University Costs
Mr & Mrs
Client
HRT
BRT / NRT
Options
• Assign segments to spouse for School costs
• Assign segments to children* for University costs as GAIN can be offset
against personal allowance (£6,475 for 2009/10)
(* Age of majority 18 in England, Wales & NI, 16 in Scotland)
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Funding the costs of further education case study
•
Anthony has an 8 year old son, Curtis.
•
Anthony has £100,000 invested in deposits
•
Anthony is a higher rate tax payer
•
He has a need to provide further education funding for Curtis.
•
The most likely time for bills to arise will be when Curtis reaches 18.
•
Currently the average cost of living for a student is £50001 per year and course fees
are capped at £3,2252.
•
He does not want his son to finish his course with a heavy debt and has asked his
financial advisor about ways to fund the debt.
1
– www.nus.org.uk NUS Student experience report 2008
2
– Costs relate to England and Wales in 2009/2010
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Funding the costs of further education case study
•
Anthony’s advisor suggests investing £100,000 in an offshore bond.
•
Assuming inflation of 3% p.a. over 10 years, Curtis would need around
£11,000 a year to cover fees and his living expenses.
•
When the money is needed, Anthony wants his son to access it in the most
tax efficient way.
•
There is essentially 2 ways he could do this.
Page 12
Funding the costs of further education case study – Option 1
•
Anthony could cash in £11,000 p.a. from the bond
•
Using his cumulative 5% tax deferred withdrawals, Anthony could taken his
money without paying tax immediately on the gain.
•
However Anthony pays income tax at the highest rate and does not see this
changing for the foreseeable future.
•
So Anthony could pay 40% tax or even 50% tax (with effect from 6/4/2010 if
his income and chargeable gains exceed £150,000) on the investment gains.
•
So the issue that Anthony pays tax at the higher rate only defers the problem
and does not solve it.
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Funding the costs of further education case study – Option 2
•
Offshore Bonds are normally split into a number of individual policies or segments.
•
Anthony’s bond is divided into 100 segments, and each is assignable to another adult
(over the age of 18). The assignee then becomes the legal owner of the segments
assigned to them.
•
After the bond has been invested for 10 years assuming 5% growth on the bond, the
bond could be worth £162,889. Each segment is now worth £1,628.89 (note this figure
does not take into account product charges).
•
Assuming Curtis has reached age 18, Anthony can assign 7 segments to him, worth
£11,402.23,
•
When Curtis cashes them in, the chargeable gain will be calculated as if he always
owned them. The gain will be £4,402.23 which is comfortably within Curtis’ personal
allowance.
•
As Curtis has no other income in that tax year, he will pay no tax on these gains.
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Funding the costs of further education case study – Option 2
This means that:
•
Through careful planning, Curtis has the potential to cash-in segments he is assigned
each year free of tax.
•
Anthony retains full control of the unassigned segments, meaning he can determine if
and when they should be assigned to Curtis. He can now change how these segments
are invested and can cash them in if his circumstances change (although this may
incur tax)
Important Information
•
This example is based on Standard Life’s understanding of law and tax practice in Ireland and the
UK at the present time
•
Legislation are liable to change in the future. The future position of a bond or an individuals own tax
position may change in the future.
•
This is only an example and may not be suitable for all customers. You will need to take a client’s
individual circumstances before making a recommendation
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Making a Gift – University Costs Planning
Assignment
• Outright gift is a potentially exempt transfer for IHT
• After 7 years, not in donors estate for tax
• Result – potential IHT saving
Making a gift : don’t waste family tax allowances
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Inheritance Tax and university fees planning case study – Option 2
Returning to the earlier case study
•
Because Anthony is assigning the segments to Curtis for his maintenance and
education, this is treated as a capital transfer for family maintenance (section 11
Inheritance Tax Act 1984).
•
This means that the transferred amounts would be immediately treated as if they were
outside Anthony’s estate for IHT purposes.
•
This should be the case as long as:
•
•
Transfers are made for Curtis’ maintenance and/or full-time course of education and
The transfers are made by 5 April in the last year of Curtis course
As Curtis is over 18, he must remain in full-time education for this to apply
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Grandparents funding university costs
• Assign segments to grandchildren to utilise personal
allowance
Mr & Mrs Client
• University or other costs
• Offshore Bond
•Age allowance
•“Gross roll up”
HRT
•Wider investment choice
•Top slicing to commencement
encashments)
(full or partial
•5% withdrawals
•Multiple lives assured
(* Age of majority 18 in England, Wales & NI, 16 in
Scotland)
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Assignment for University Costs
• Onshore Bond
• No credit for tax paid within fund
• Top slicing to last chargeable event
(partial encashments)
• Top slicing to commencement
(full encashments only)
• Offshore Bond
• “Gross roll up”
• Wider investment choice
• Top slicing to commencement
(full or partial encashments)
(* Age of majority 18 in England, Wales & NI, 16 in Scotland)
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Assignment for University Costs
Offshore Bond benefits
• Ability to retain CGT allowance for own
benefit
• Ability to assign to children and/or
grandchildren
• No HRT liability on accumulated or distributed
investment income
• Gross investment growth
• Gross proceeds (if gain and other income
within personal allowance)
• Wider investment choice
• Top slicing to commencement (full or partial
encashments)
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Conclusion
•
The ‘true cost’ of funding university is likely to be significant and higher than
many people anticipate.
•
Parents need to start planning for their children’s future today
•
An offshore bond offers a number features which make it an ideal solution for
many client’s savings requirements.
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Standard Life International
Important information
This presentation is for professional advisers only and should not be distributed
to third parties.
The value of investments and any income from them may fall as well as rise and
investors may not get back the amount originally invested. In addition, the value
of investments may increase or decrease as a result of changes in exchange rates
between currencies. Past performance is not a reliable guide to future
performance.
Any reference to legislation and tax is based on Standard Life’s understanding of
law and tax practice in Ireland and the UK at today’s date. Tax reliefs mentioned
are those currently available and may be subject to change.
No guarantees are given regarding the effectiveness of any arrangements entered
into on the basis of this presentation. The value of tax reliefs to the investor
depends on their financial circumstances and may vary.
This presentation is for professional advisers only and should not be distributed to
third parties.
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© 2009 Standard Life International
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