What inheritance tax protection strategies can I use for my ISA funds to ensure they support my grandson's education in the future?

Dear Boring Money,

I have a very decent pension circa £40k per annum from workplace pensions and £660k in a SIPP, plus £150k in savings. In addition, I have £350k in ISAs. I would like to use these for my grandson’s senior school education.

He is currently 3 years old. I am 68 years old.

Understandably my daughter does not want her son, my grandson, to inherent a large sum of money in his late teens/early twenties, when he might be tempted to do something silly. Hence the idea of providing an education for him.

My question therefore is - Is there anything I can do to protect the ISA fund from inheritance tax if I don’t live for 7 years after his 18th birthday - something that is highly unlikely to happen!

Thank you.

What a great way to reduce potential inheritance tax (IHT) liabilities by paying for your grandsons’ education. Without knowing the exact details of your situation there are a number of things you can consider in order to meet your objectives.

From 6 April 2027, your SIPP as well as your ISAs and savings will be included for IHT. If you do not wish to gift directly to your grandson, you could consider gifting the ISA funds to your daughter through annual exemptions and larger gifts.

You have said you do not wish to gift directly to your grandson, so setting up a bare trust to hold funds for him is not advised. However, you could look to set up a discretionary trust – this would give trustees discretion over the distribution of the funds, ensuring the money is used for your grandson’s education. Trusts are complex, so you would need some advice here.

Both options would require you to live for 7 full years to gain full IHT relief.

You could also consider a life insurance policy that would provide a lump sum payment upon your death, which could be used to pay the IHT liability on your estate.

Another option may be to pay the school fees upfront when your grandson starts senior school at age 11, so more chance of outliving the 7-year rule.

Most importantly, the key is to balance flexibility and control whilst meeting your objectives. It is most certainly an art not a science, and I highly recommend speaking to a financial adviser to ensure your plan is structured correctly, and your IHT strategy is appropriate.