Educating children costs | Crowe Financial Planning UK Limited

Getting started

When planning for any significant financial events, it’s helpful to follow a few basic rules.

Determine when the money will be needed e.g. how many years before the child reaches age 18.
Establish the current level of fees required and assess how much they are likely to increase between now and when the funds are required.
Match this against any funding that is currently in place and establish what the gap is likely to be.
If there is a gap, consider the level of investment risk in relation to when funds will be required.
Can funding for the gap be made through lump sums and or regular savings?

Next Steps

Once this has been done, there are numerous funding arrangements to consider that can help further. As a quick summary of the main funding options includes:

Cash and National Savings & Investment accounts – low return but low risk.
ISAs and Junior ISAs – given their tax-free status these should be on the shortlist to consider.
Friendly Society plans – a tax efficient regular premium investment vehicle but with modest premiums and can be inflexible.
Equity based collectives (unit trusts etc) – a regular premium or lump sum investment vehicle that can make use of a child’s annual capital gains tax exemption. Potentially higher returns and some tax efficiencies but higher risk.
Investment Bonds – a lump sum investment vehicle that offers a tax efficient role up, especially offshore bonds, with the capability of realising gains within the (adult) child’s personal allowance and/or starting/basic rate band.

What about the tax?

Where a parent wishes to make a gift of capital to a minor, unmarried child who is not in a civil partnership e.g. to open a bank account in the child’s name or to invest in a collective investment in the child’s name, the income arising from the transferred capital will be taxable on the parent if it exceeds £100 gross in a tax year. Most assets, such as bank accounts and unit trusts produce annual taxable income so this can be a potential problem. Please note, this will not be the case if the donor is other than a parent of a minor unmarried beneficiary and not in a civil partnership. So, if the donor is a Grandparent, for example, the £100 rule should not be a concern.

Investment bonds

However, if the financial capital is coming from the parent in the form of an assignment of ownership of an investment bond, then investment bonds can be a useful option. These are non-income producing assets with all income arising rolled up and added to the value of units. Provided the bond has not been placed in trust with the child as a beneficiary, the £100 rule should not be a problem. When gains are realised under the bond, they are subject to Income Tax rather than Capital Gains Tax. This makes investment bonds tax simple, but it’s important to note that no credit/reclaim can be made by non-taxpayers, such as children, in respect of the tax deducted at source in the fund where a UK bond is used.

If an offshore bond is used, no internal taxation occurs (apart from any withholding tax) resulting in a ‘gross roll-up’. This means that all investment income and capital gains accrue for the child’s benefit, even if the donor is a higher or additional rate taxpayer. This makes this type of investment ‘tax attractive’.

Assignment - Use the tax system to your advantage

An assignment is a way of transferring the legal ownership of an investment bond from one party to another. An investment bond is made up of individual policies, otherwise referred to as segments and it is possible to assign one or more segments without having to assign all of them. As a result, an investment bond is often a way for a parent to keep control of the investment while assigning, by way of a gift, segments from their bond to their children once they reach the age of 18, as and when required. Provided the assignment is made as a gift and not in exchange for money or other consideration it is not a chargeable event for tax purposes. However, it will generally be considered a Potentially Exempt Transfer (PET) for Inheritance Tax (IHT) purposes. This means the gift should fall outside of the assignor’s estate after seven years, which can support a family’s IHT planning strategy.

The segments of the investment bond assigned are now in the hands of the adult children who then effect the surrender themselves. The benefit of this is that the child can utilise any available personal tax allowances. Bond gains are subject to Income Tax and as the children are students their income is generally modest. This allows them to use some or all of their Personal Allowance (currently £12,570), Starting Rate for Savings (currently £5,000) and Personal Savings Allowance (currently £1,000 for non-higher rate taxpayers) to absorb this gain. They can also benefit from top slicing relief which can help reduce any taxable gain.

Example

10 years ago, Mr & Mrs Planner invested £100,000 into an offshore bond with 1000 policy segments (£100 per segment). They have two children who are both attending university. The bond is to be used to cover the university fees and some of their living expenses. The surrender value of the bond is currently £200,000 (£200 per segment) and Mr & Mrs Planner have agreed to give their children £15,000 each year whilst they are at university.

Each segment is worth £200 and 75 segments would need to be assigned to each child to make up the first year’s amount of £15,000. The assignment, as mentioned above, is a gift and is not a chargeable event.

Therefore, Mr & Mrs Planner have made a PET of £15,000 each. When the children encash their 75 segments there is a gain of £7,500 (this is because each segment has grown in value by £100, multiplied by 75 segments is £7,500).

If each child has no other income and the chargeable gain is less than the total income tax allowances available (in 2025/2026) no tax would be payable.

Mr & Mrs Planner could repeat this each year and provided the gain is less than their unused tax allowances, currently £18,570, and the children have no other income, no tax will be payable.

And beyond

Any segments remaining in the bond once University has been funded can be retained by the parents and then assigned for other purposes such as being put towards buying a car or as a deposit for a house to help the children onto the property ladder.

As usual with financial planning there is more than one way for parents to support their children with the costs of further education and beyond. If you would like to discuss this or other ideas further, please do contact us.