Bank of Gran and Grandad: helping with private education

Helping Grandchildren with School Fees: Tax-Efficient Gifting Opportunities

Following the introduction of VAT on independent school fees, recent research suggests that the cost of privately educating a child between the ages of five and 18 now averages around £350,000 (excluding boarding costs). With figures such as these, it is unsurprising that many families are reconsidering private education, with more than a third of parents reportedly considering withdrawing their children because of the financial burden.

For many families, support from grandparents can make a significant difference. Providing financial assistance during a lifetime, rather than leaving funds by way of a Will, can also present valuable inheritance tax (“IHT”) planning opportunities.

Lifetime gifting by grandparents

A simple outright gift from a grandparent to pay school fees may become subject to IHT if the grandparent fails to survive seven years from the date of the gift. However, there are two exemptions worth bearing in mind.

The first is the annual gifting exemption. Individuals may give away up to £3,000 each tax year free from IHT. This means that two sets of grandparents could potentially contribute up to £12,000 per year collectively without creating an IHT liability.

The second is lifetime gifts made out of surplus income. Where certain conditions are met — such as the gifts forming part of the grandparent’s normal expenditure and sufficient income remaining to maintain their standard of living — the gifts may be exempt from IHT. Importantly, there is no upper limit on this exemption and no requirement to survive seven years.

What is the best way to make a gift?

Grandparents may choose to make gifts directly to parents to assist with school fees, or alternatively make contributions into existing or newly established trusts for the benefit of grandchildren. When structured carefully and combined with the available exemptions, such arrangements can help support future educational costs while also reducing potential exposure to IHT.

For more advice on funding private education, please contact the Private Client team here at Wansbroughs.