Case Study: Saving inheritance and income tax with a bare trust

Tax efficient saving for your children's future

Sarah has recently retired from her role as CEO of a publishing firm with a pension of £55,000 a year, cash deposits of £500,000 and over £1million of property assets. Her normal expenditure is around £1,700 a month, but she does not want to accumulate further savings which will be subject to IHT. Her nephew wants to educate his two year old son Alfie privately and Sarah agrees to help cover the costs.

She sets up an investment account designated into Alfie’s name and invests £500 each month on his behalf. The gift is made every month and has no impact on Sarah’s standard of living so there is no IHT to pay on the gift.

The contribution is invested into a portfolio of UK and International equities. The dividend income generated by the portfolio is less than Alfie’s Personal Allowance so there is no tax to pay. Sarah authorises withdrawals to be made when Alfie’s school fees are due. If any funds remain once Alfie turns 18, he can withdraw these to help with his university costs.

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