What's the best way to invest for my grandchildren's future?

22 October 2013

Q

I have set up a trust for my grandchildren's education and want to know if I'm able to hold a variety of financial products in it, such as Isas, bonds and premium bonds. Or do these all have to be liquidated first and then put in to the trust? Also, is a trust the best way for me to be investing to achieve my goal?
From
LS/Devon

A

When you gift investments into a trust, they must normally be sold and then repurchased by the trust because there is a change of ownership. Insurance company investment bonds are usually an exception, as it is often possible to assign them to a trust – in other words, to change ownership without having to sell.

In the case of Isas and premium bonds, it's not possible to hold them in trust, as both can only be held by individuals.

Whether using a trust will prove worthwhile and cost effective depends on what you want to achieve. If it's simply a case of restricting when and how your grandchildren can access the money, you might decide to retain your existing investments, especially those that benefit from favourable tax treatment, such as Isas, and gift the money when required or pay the education fees directly.

If you would rather ensure more certainty or continuity, for example should you die meanwhile or wish to get the money out of your estate for inheritance tax planning purposes, then giving away the money now using some sort of trust might be beneficial.

However, if you use a discretionary trust, which may be likely, then if gifts exceed your inheritance tax nil rate band (currently £325,000), an initial chargeable lifetime transfer 'tax' of 20% would apply, followed by a further 10% periodic charge every 10 years. Income and gains within the trust are also subject to high rates of tax, although beneficiaries can potentially reclaim this.

A much simpler and likely cheaper option is to use a bare trust, which simply means your grandchildren can't touch the money until they're 18, at which point they become the owner.The money is taxed as theirs, meanwhile. It's a popular option, the downside being there's no flexibility to change things or extend the age at which the money becomes theirs.

It could be well worth seeking specialist advice if you decide to take this further.