FUNDING FOR EDUCATION.

1. FUNDING FOR EDUCATION. Trevor Finch FCII, Cert PFS Chartered Insurer Tax and Estate Planning Manager February/March 2013

2. IMPORTANT INFORMATION. The details contained in this presentation are based on Legal & General’s understanding of current tax law and HM Revenue & Customs’ practice. This may be subject to change which cannot be foreseen. This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private customers or any other persons. Tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.

3. LEARNING OUTCOMES.

4. FUNDING FOR EDUCATION. • 57% of parents would send their children to an independent school if they could afford to (only 25% would not) • 59% of parents believe they have higher educational standards than state schools (only 6% believed they were lower) • Average school fees a term: • Senior (11 to 16) Day Fee Day Schools £3,851 • Senior (11 to 16) Day Fee Boarding Schools £5,185 • Senior (11 to 16) Boarding fee £8,708 • Sixth-form (16 to 18) Day Fee Day Schools £3,984 • Sixth-form (16 to 18) Day Fee Boarding Schools £5,614 • Sixth-form (16 to 18) Boarding fee £9,189 Source: Independent Schools Council 2012

5. FUNDING FOR EDUCATION. FOR THOSE WITH CAPITAL TO INVEST – TAX EFFICIENCY IS ESSENTIAL! • Use of trusts? • Choice of investment vehicle? • Specialist advice!

6. FUNDING FOR EDUCATION. WHO PAYS THE FEES? • Grandparents? • In or near retirement • Financially established • Investment portfolio • Greater disposable income • Conscious of potential future inheritance tax (IHT) liability • Parents? • Income and savings predominantly accounted for

7. FUNDING FOR EDUCATION. OPTIONS • Grandparents maintain administrative involvement and continue to suffer tax on their investment • Grandparents pass capital to parents who assume administrative involvement and suffer tax on the investment • Grandparents establish an appropriate trust for benefit of the grandchildren

8. FUNDING FOR EDUCATION. CHOICE OF TRUST • Absolute trust (bare trust): • Inflexibility • Beneficial rights • Parental settlement provisions • Transfers

9. FUNDING FOR EDUCATION. CHOICE OF TRUST • Discretionary trust: • Flexibility • Beneficial rights • Transfers

10. FUNDING FOR EDUCATION. CHOICE OF INVESTMENT VEHICLE • Single premium investment bond: • Can be divided into individual segments giving the potential for greater tax efficiency • Does not generate any personal tax liability until a chargeable event occurs • Individual segments can be assigned to adult beneficiaries • Has a cumulative yearly 5% tax deferred withdrawal facility • Choice of withdrawal strategies to determine who pays the tax and when

11. FUNDING FOR EDUCATION. CHOICE OF INVESTMENT VEHICLE • Onshore single premium investment bond: • Corporation tax paid within the funds • Tax paid cannot be reclaimed

12. FUNDING FOR EDUCATION. CHOICE OF INVESTMENT VEHICLE • Offshore single premium investment bond: • All growth generally tax free until a chargeable event occurs • Greater investment opportunities • Potentially greater returns when compared to an onshore investment bond

13. FUNDING FOR EDUCATION. SCHOOL FEES • Grandparents: • Establish an absolute trust • Appoint parents as the trustees • Gift capital to trustees • Gift constitutes a potentially exempt transfer

14. FUNDING FOR EDUCATION. SCHOOL FEES • Parents: • Choose to invest in offshore investment bond • As fees become payable, they cash in individual segments • Gain assessed on beneficiary who is typically a non-taxpayer • Gain offset against beneficiary’s personal income tax allowance of £8,105 (£9,440 for 2013/2014)

15. FUNDING FOR EDUCATION. SCHOOL FEES • Example: • Grandparents are both higher rate taxpayers and wish to make provision for their grandson’s private education • They expect to remain higher rate taxpayers and consider investing £90,000 into an offshore bond which is to be divided into 900 individual segments of £100 • We have assumed that annual fees are £10,000 and are expected to rise by 3% each year in this example. School fees are due to start in 5 years and will continue for 7 years until the grandson reaches age 18 • We have assumed an annual return of 6% each year and ignored product charges.

16. FUNDING FOR EDUCATION. SCHOOL FEES:

17. FUNDING FOR EDUCATION. SCHOOL FEES • Investment by grandparents in their own name • Segment encashment values sufficient to pay fees • However, tax paid of £13,513 on the annual gains left a shortfall • Use of an absolute trust • Gain each year assessed on grandson and covered by his personal income tax allowance • Tax saving of £13,513 on total payments of £90,482 • Remaining value of investment bond could be used to fund grandson’s further education

18. FUNDING FOR EDUCATION. UNIVERSITY COSTS • Parents: • Establish a discretionary trust • Gift capital to the trust • Gift constitutes a chargeable lifetime transfer • Choose to invest in offshore investment bond

19. FUNDING FOR EDUCATION. UNIVERSITY COSTS • Parents: • As financial assistance is required, trustees assign individual segments to the beneficiary • Assignment does not constitute a chargeable event and does not therefore trigger a tax charge • On subsequent encashment, gain is assessed on the beneficiary who is typically a non-taxpayer • Gain offset against beneficiary’s personal income tax allowance of £8,105 (£9,440 for 2013/2014)

20. FUNDING FOR EDUCATION. UNIVERSITY COSTS • Example: • Parents are both higher rate taxpayers and wish to make provision for their daughter’s future, including the payment of her university fees and ongoing living expenses • They expect to remain higher rate taxpayers and consider investing £100,000 into an offshore bond which is to be divided into 1,000 individual segments of £100 • We have assumed that annual costs are £20,000 and are expected to rise by 4% each year. They are due to commence in 5 years and she is expected to graduate after 4 years • We have assumed an annual return of 6% each year and ignored product charges.

21. FUNDING FOR EDUCATION. UNIVERSITY COSTS:

22. FUNDING FOR EDUCATION. UNIVERSITY COSTS • Investment by parents in their own name • Segment encashment values sufficient to pay fees • However, tax paid of £13,046 left a shortfall • Use of a discretionary trust • Gain each year assessed on daughter and should be covered by her personal income tax allowance • Tax saving of £13,046 on total payments of £103,616 • Remaining value of investment bond could be used to buy daughter a car or help with the deposit for her first property

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