Paying Your Grandchildren’s School Fees

Inheritance Tax concerns

Inheritance tax (IHT) is a growing concern for many people, particularly those edging towards retirement.

The UK is becoming increasingly dependent on IHT revenue to help reduce the budget deficit. The upward trend in IHT receipts since the inception of the tax indicates that this is a burden which is set to grow. With the right advice and preparation however, it is still possible to ensure that loved ones benefit from inheritance whilst reducing exposure to the 40% rate.

School fees

A measure that is proving increasingly popular to those with grandchildren in private education is to contribute towards their school fees. This works well on various levels; grandparents obtain the benefit of some IHT planning by reducing the value of their estate and parents have more disposable income as a result of needing to pay less in school fees.

One way of achieving this could be to utilise the £3,000 annual exemption. Gifts up to this value may be made every year – by each grandparent – completely free of IHT. This amounts to a fairly substantial sum over the course of a child’s education.

For those grandparents that wish to contribute above or in addition to the annual exemption, regular school fee payments may be made from their income. Such gifts will be exempt for IHT purposes provided that they come from surplus income and do not negatively impact on their normal standard of living.

Where insufficient income is available to make regular contributions, school fee payments could be made from capital. Such gifts would be potentially exempt transfers (PETs): free from IHT provided that they were made at least seven years prior to the death of the donor(s). A discounted rate of IHT would apply where death occurred between three and seven years after the gift.

Setting up a trust

A final possibility to consider where grandparents are able to offer a lump sum gift would be to set up a trust for the purposes of paying school fees or other educational costs. Depending upon the type of trust selected it is possible to gift assets but still retain an element of control, which is often desirable where younger children are concerned or where there are difficulties between a child’s parents. Up to £650,000 may be gifted as a couple with no immediate charge to IHT and, provided that the settlors are still alive seven years after making the gift into trust, the transferred assets will not be included in their estate.

Those grandparents that are able to make a contribution towards their grandchildren’s school fees could reduce the proportion of their estates that may be subject to IHT at 40%. With private schools fees only set to increase, there has never been a better time to contribute and benefit from IHT planning.

Each individual’s circumstances are different, so a personal review is always needed to ensure that the most suitable strategy is employed.

If you would like further advice on IHT planning, please contact us on 01903 234094.