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Home / News and Insights / Insights / How grandparents can ease Labour’s VAT raid on school fees

Grandparents have long helped fund the education of grandchildren, and with the increasing likelihood of a Labour government introducing VAT on school fees, grandparents may be asked to dig a little deeper.

Here, Hugo Smith, partner in our private wealth team, explains how grandparents can help with school fees – and where problems can occur.

Outright gifts

Perhaps the easiest way to help grandchildren with schooling is an outright gift paying fees each term or annually. It is, of course, possible to make a gift of £3,000 a year without any inheritance tax (IHT) implications but that will not go far given average school fees now top £35,000.

For every gift, the seven-year rule starts ticking and given grandchildren rarely arrive all at the same time, that can cause a lengthy IHT tail. For that reason, it may be better to make a lump sum gift to cover fees for more than one year to start the seven-year clock running.

Additionally, should a grandparent lose mental capacity will any lasting power of attorney (LPA) permit the ongoing payment of school fees given that they are intended to support the welfare of that individual? They can, but that LPA will need to be carefully worded.

Gifts out of surplus income

Where grandparents have perhaps a generous pension or independent incomes it is possible to make gifts with no IHT implications out of any surplus income. The rules are complex, and it will be necessary to keep detailed records of payments and be able to demonstrate they have excess income over what is needed to maintain their usual standard of living.

Discretionary trusts

Discretionary trusts are a useful way for grandparents to provide school fee support for existing and yet-to-be-born grandchildren. They can extend beyond their school careers to help fund university studies.

Cash and assets up to £325,000 can be put into a trust free of IHT. There are ongoing maintenance obligations, with a trust tax return prepared annually and tax will need to be paid on income generated by the trust. Discretionary trusts will mean grandparents lose the right to access those assets should circumstances change.

If the obligation of a discretionary trust seems too onerous it is possible to create what is called a bare trust, where cash given to a grandchild is held and managed by parents or grandchildren. Funds in a bare trust can be controlled by grandparents. That is, however, until the grandchild turns 18 when they can access any remaining cash and spend as they wish.

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