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Parents wishing to give their children the benefit of a private education face startling costs. The average fee for a boarding school is over £30,000 a year for a single pupil, and for day pupils over £17,000. Then there are the costs of extras such as clothing and equipment.

After school, the costs of university education are considerable, and many parents are keen to assist their children to avoid the burden of student loans.

One way in which either or grandparents can provide for educational costs in a tax-efficient manner is to invest in an offshore investment bond. Because the insurance companies which provide these bonds are based outside the UK (though many are subsidiaries of UK companies) their products enjoy special tax treatment.

If £100,000 were invested in an offshore bond, this could be divided into 1,000 segments of £100 each so as to facilitate part-disposals. The bond would be transferred into a bare trust of which the parents would be the trustees and the child or grandchild the beneficiary.

Bare trusts are tantamount to gifts. The beneficiary has an absolute right to the assets held in the trust, but can only exercise this right when they reach the age of 18. Meanwhile the parents act as nominees for the child.

The funds held within the bond would be invested in a suitably diversified portfolio, and when the educational fees became payable the trustees would encash an appropriate number of segments. Tax on whatever investment growth had accrued would be assessed on the child, who would normally be a non-taxpayer.

The gain could be offset against the child’s personal tax allowance, which is currently £11,000 p.a.. The child would also have the benefit of both the £5,000 starting tax rate for savings income and the £1,000 personal savings allowance.

For optimum tax-efficiency the gift should be made by a grandparent, because income in excess of £100 p.a. received by minor children  which arises from gifts made by parents will be regarded as the parent’s income for tax purposes.

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