Grandparent grandchild bike

Financing of school fees: tax-efficient ways grandparents can help

Debbie Beecroft, Manager, Private Clients
04/08/2022
Grandparent grandchild bike

Many parents opt for their children to attend private schools and the associated costs can have a huge impact on their finances, the impact of which is only set to increase with the rising costs of living currently being experienced.

If family circumstances permit, there are some tax-efficient options available whereby grandparents are able to provide some financial assistance to ease some of the burden on parents.

Gifts out of income

Grandparents could choose to make ‘regular’ gifts out of their excess taxed income.  For this to be outside the scope of tax, grandparents need to be able to show that they have excess taxed income available after their standard living costs. A detailed schedule should be prepared covering all incomings and outgoings to be able to show the level of excess income available.

While the term ‘regular’ could be monthly, quarterly or annual, the gifts could also be by school term; the main criteria being that the gifts can be seen to be regular and a record is maintained to show this.

Discretionary Trust

Trusts can prove to be useful vehicles for financing school fees and can be established with grandparents as the settlors and the grandchildren as the beneficiaries. The Trustees would have discretion over how much and when to make distributions and who to.

Assets settled into Trust could be invested into income producing assets, for example, a share portfolio or a buy to let property. If the initial Trust value is within the Inheritance Tax nil rate band (currently £325,000) no immediate tax consequences will arise.

The income generated by the Trust could be distributed to the beneficiaries to finance their educational needs. Any income distribution from the Trust will carry a tax credit and depending on the individual circumstances of the beneficiaries, it may be possible to obtain an income tax repayment from HMRC.

This route will incur some initial professional fees relating to the drafting of the Trust deed. The Trustees will also have ongoing compliance matters to attend to as they will be required to complete and submit annual Trust tax returns to HMRC and pay tax on the income generated.

Bare Trust

If the cost and administration burden of the discretionary Trust route is too onerous, a gift of capital could be made to the grandchild directly and held by the parents/grandparents in a bare Trust. Any income produced by the assets bought with the capital will be taxable on the child and not the parents or grandparents but they will have full control of the funds. However, any funds left in the bare Trust when the child turns 18 will belong to the child and they can choose, at this point, to take full control.

Gift Allowances

HMRC allows each individual to give away £3,000 each tax year without these having any tax consequences. The £3,000 is known as an ‘annual exemption’ and can be given to one person or split between several people. While this annual exemption is relatively small compared to the annual cost of private school fees, it is an available allowance that is often overlooked.

If an individual did not utilise their annual exemption in the previous tax year, the are also able to make use of this.

Example

In 2021-22, Henry decides to gift his daughter Sarah a cash gift of £3,000. Henry did not use his annual exemption in 2020-21 and therefore also decides to gift his son Mark a cash gift of £3,000. Both of these gifts will be outside the scope of tax however if Henry decided to make further gifts in 2021-22 tax consequences may arise. Henry will have a further annual allowance available in 2022-23.

The gift does not have to be in cash, it can be the gift of an asset, although there are potential Capital Gains Tax implications from such gifts.

Professional advice should be sought before deciding on any of the above and to ensure that no adverse tax consequences will arise. For more information on the topics raised in this article or to discuss your individual circumstances get in touch with Sue Daye or your usual Crowe contact.

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Sue Daye
Sue Daye
Partner, Private Clients
Cheltenham