Trust investments

[esmondo]

A discretionary trust has been set up with a lady and her two minor children (13 and 17) as potential beneficiaries. The settlor is alive and UK resident.

The trustees want to make an investment that allows them to pay the children's school/uni fees (£25k and £11k pa respectively) and these amounts would exceed any 5% allowance if a bond were used. What is the most tax efficient investment to enable them to pay the fees? I understand that using collectives will create a lot of additional paperwork and am not sure of the best investment to minimise tax while the children are too young to have any bonds assigned to them.

Any ideas at all please??

Thank you

[tax_schmax]

If segments of a bond are assigned to a beneficiary, there is only income tax on the proportion encashed that represents growth, in their personal estate, rather than in the trust. This would avoid paperwork and save income tax in the trust. If the adviser you are using is not aware how to use bonds in this way, be wary. The trustees are duty bound to obtain and consider appropriate advice. The right type of bond needs to be used and the adviser should be experienced in trustee investment of this type or happy working with a better tax adviser.

[esmondo]

Thank you for anwering so quickly but I think our problem is that the children are too young to have any segments assigned to them, we have been told they can only be assigned to adults. Would it work if they were assigned to their mother instead, and she used them to pay the school/uni fees?

[tax_schmax]

Yup!

Obviously if the mother is a higher rate taxpayer you may have a bit more of a liability. You need to consider the CGT consequences of switching investments inside the trust (i.e the top rate and a reduced allowance), income tax at higher rates (particularly if you are using corporate bonds), operating a tax pool, the cost of the other admin, tax returns and reclaims for the children. Measure this against the likely tax on the mother and you'll have your answer. Worth baring in mind that 18 year old can receive assignments and often have an entirely unused personal allowance.

[esmondo]

Ah thanks, your wise words make sense!

[maths]

I assume the settlor is not the spouse of the lady nor the parent of either child?

Appointment by trustees out to a minor of, for example life insurance bonds, is possible by the simple expedient of the appointment being to the child's parent on behalf of the child.

Why was the trust option chosen ?