Using investment bonds and trusts to pay for education

Funding private school fees or supporting a child through university requires careful, long-term financial planning. With education costs continuing to outpace inflation, using investment bonds within discretionary trusts offers grandparents and parents a flexible, highly tax-efficient structure to build and distribute funds for a child’s future.

Investment bonds can be highly tax-efficient investments for discretionary trusts. As non-income producing assets, they can avoid the trustees’ high income tax rate on savings income (currently 45% but increasing to 47% in 2027-28). 

How investment bonds are taxed within a trust

If the trustees trigger a chargeable event, an income tax liability can arise on any chargeable event gain. The settlor is assessed on any chargeable event gains if alive and UK resident in the tax year in which the gain arises. 

Chargeable event gains are treated as savings income for tax purposes but, when assessed on the settlor or a beneficiary, top-slicing relief can reduce the rate of tax applying to the chargeable event gain. UK investment bonds benefit from a basic rate income tax credit (currently 20%, increasing to 22% in 2027-28) to compensate for the tax paid within the underlying fund.

If the settlor died in a previous tax year or is non-UK resident, chargeable event gains from UK bonds will be taxed on the trustees at, currently, 25%, after allowance for the basic rate income tax credit. For gains arising on offshore bonds, trustees are taxed at 45% (47% from 2027-28). Top-slicing relief is not available for trustees. 

While investment bonds offer valuable tax efficiency for families investing for children, it is important that proceeds are taken in a way that maximises this tax efficiency. 

If cash is needed for an adult beneficiary e.g. university

Where the settlor (or trustees, if the settlor is deceased or non-UK resident) is paying a higher tax rate of income tax than the beneficiary, it can be tax-efficient for the trustees to assign segments of the bond to the adult beneficiary before encashment. 

The advantages are: 

• Assigning bond segments does not constitute a chargeable event; 
• on encashment, the beneficiary benefits from top-slicing relief over the whole lifetime of the bond; and 
• as the beneficiary typically has a lower income than the settlor or trustees, any resulting tax charge is substantially reduced - or eliminated entirely.

If assignments are made regularly to cover ongoing higher education costs, complete tax freedom can be achieved if the gains fall within the beneficiary’s Personal Allowance, Personal Savings Allowance, or Starting Rate for savings (for offshore bonds), or within their basic rate tax band after top-slicing relief (for UK bonds).

If cash is needed for minor beneficiaries e.g. school fees

Because minor children cannot give trustees a valid legal discharge, bond segments cannot be legally assigned directly to a minor. Planning options instead depend on the settlor’s relationship to the beneficiary: 

• Non-Parents e.g. grandparents: If the settlor is not the beneficiary’s parent, the trustees can appoint benefits absolutely to the beneficiary so, going forward, they hold the bond segments on bare trust for the beneficiary. Any subsequent chargeable event gains will then be taxed on the beneficiary. 
• Parents: If a parent creates the trust, an absolute appointment to a minor child triggers the parental settlement rules. This taxes any gains over £100 per annum per parent as income of the parent, defeating the tax advantage.

If the trustees wish to make funds available for the benefit of the minor child without triggering a chargeable event, they could take withdrawals within the bond’s 5% p.a. cumulative withdrawal allowance and apply these withdrawals as an advancement of funds for the benefit of the child. 

Once the child reaches age 18 (the age of majority), the trustees could, if appropriate, assign bond segments to the young adult to encash in their own name. Alternatively, the trustees could make an absolute appointment of some, or all, of the trust fund so it was held absolutely for the adult child, meaning that any subsequent chargeable event gains arising would be taxed on him or her. On final encashment, any previous withdrawals and excess chargeable event gains would be brought into account. 

Example: 

Five years ago, Bob and Sue invested £300,000 into an investment bond held in a discretionary trust for their son, Rupert, and future grandchildren. The bond is now worth £500,000 and, as Rupert, now aged 7, is starting private school, they want to use the trust fund to help meet the cost of his school fees. 

Their adviser suggests they withdraw up to £21,818 p.a. towards meeting the fees until Rupert’s age 18. As the bond is already 5 years old, these withdrawals will not trigger an excess chargeable event as they fall within the bond’s cumulative 5% p.a. withdrawal allowances. 

When Rupert reaches age 18 and goes to university, the trustees can then either: 

• assign segments to him to encash for use towards university costs; or 
• appoint part of the trust fund to him absolutely and then encash segments to help pay his university costs. 

If Rupert has no other significant income, it is very likely that any chargeable event gains would not incur an income tax liability either because: 

• he is not a higher rate taxpayer (UK bond); or 
• he is not a taxpayer (offshore bond). 

As trust and tax rules continue to evolve, structured financial planning plays a crucial role in delivering maximum tax efficiency for your clients. Speak to your existing TPO contact or get in touch to explore how we can complement your existing professional services and deliver joint value for your clients.

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The Financial Conduct Authority does not regulate tax planning or trusts.

The value of your investments can go down as well as up, so you could get back less than you invested.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

The information in this article is correct as at 19/08/2026.