Our clients (Mr and Mrs A) were looking contribute £100,000 towards their grandchildren’s school fees and were keen to structure these payments in a tax efficient manner.
Our client’s daughter and son-in-law were the shareholders in a trading company. It was therefore proposed that Mr and Mrs A subscribed £100,000 for some new shares in the trading company, which would subsequently be transferred to a trust for the benefit of the grandchildren.
Following discussions with our clients about their objectives, it was decided that:
- A discretionary trust was the most suitable type of trust as it would allow the trustees to accumulate income (i.e. if the trust income is more than the school fees) and retain control of how the trust income and capital is distributed.
- The shares to be issued would be a mix of preference shares and ordinary shares. This was to ensure that the original shareholders of the company retained control whilst providing more flexibility as the structure progresses going forward. We also considered the option of issuing solely preference shares, however the shareholders were reluctant to allow the new shares to have preferential rights over dividends.
The above structure was set up in a tax-neutral manner.
Going forward, dividends from the company will be paid to the trust, which when distributed to the grandchildren will benefit from their personal allowances and basic rate bands. This structure is more efficient that Mr and Mrs A simply paying the school fees each year as their funds will have already been subject to tax prior to the transfer, whereas the grandchildren in this scenario will have their full allowances available.
Furthermore, this planning has additional benefit of reducing the value of Mr and Mrs A’s estate for inheritance tax purposes by the value subscribed for new shares which were subsequently transferred into the trust (provided that they survive the transfer by seven years).