Many families are finding it harder to meet day-to-day costs and expenses, which increase year-on-year. In particular, educating their children at private school is becoming more and more costly and in some cases unaffordable.
School fees have over the past 10 years increased by 50 per cent in real terms. Fees at London-based schools can approach £30,000 a year and boarding fees can be upwards of £50,000. For many, the option of private education is no longer on the table.
The proposals from Labour to introduce VAT on private school fees will make the costs even higher. Many grandparents, who were able to educate their children privately 30 years ago, now look on at the struggles their children face to replicate the same education for their own children and wonder how they can help.
Fortunately, there are a number of ways in which grandparents can help. This can have many benefits, not only for children to get their education but also for parents who are relieved of the financial burden because of the grandparents who can obtain some tax savings from doing so.
It is also important to consider how education can continue to be funded until the grandchild is 18, so thought must be given to what might have to happen if the grandparent dies, loses capacity or has a change in financial circumstance, such as requiring extensive nursing care.
What are the options and tax implications for grandparents wishing to help with school fees?
Gifts
The simplest way to help is for grandparents to pay the fees from their own resources as they arise. From a tax perspective, this is treated as gifts via the grandparents. If they die within seven years, that gift will be brought back into account on their death.
This is not the most inheritance tax-efficient way of paying school fees. If you have a lump sum available, a better approach would be to make a gift of as large a sum as possible, to pay a number of years' school fees, to get the seven year clock running on the gifts.
If, for example, you were able to make a gift of sufficient funds to pay for the entirety of a child’s education, they could be invested so only the required sum is drawn down each year to fund the liability as it arises.
You then need to consider the best option for the gift. The simplest approach would be to give funds to your children, which they can then use over time to fund their own children’s education. However, there can be no guarantee that those funds will be used for their child’s education.
Family disasters can happen, such as divorce or bankruptcy or parents might simply decide not to continue with private education for their children and spend the funds elsewhere.
Clients with substantial incomes can take advantage of a very powerful IHT relief, which can produce significant IHT savings.
