If you’re thinking of giving your children a helping hand with your grandchildren’s education costs, then you should consider if this generosity could have an impact on your own inheritance tax position.
An individual can gift up to £3,000 per annum without any implications for inheritance tax, but this amount will often not cover school fees. Gifts over that amount are still counted for inheritance tax purposes for seven years.
Below, I’ve summarised some of the ways in which people can arrange their affairs to help with school fees.
Outright Gifts
Gifts of cash or assets can be made, and the value of these gifts would leave your estate after seven years. If you die within the first three years from the date of the gift, the full value of the gift (known as a “potentially exempt transfer”) would come back in to charge, and inheritance tax would be due. From the third anniversary of the gift up to the seven-year anniversary, taper relief is available to reduce the amount of inheritance tax due, working on a sliding scale from 40% to 0%.
If you gift an asset, capital gains tax may also be due based on the open market value of the asset if you are deemed “connected” to the donee for tax purposes. The capital gains tax implications will be dependent upon the type of asset that is gifted and further advice should be sought.
Gifts out of surplus income
Gifts out of surplus income can be made and are exempt from inheritance tax immediately – this means making a regular payment (e.g. school fees) out of your regular excess income and not your capital (e.g. savings or investments). Care should be taken using this tax relief as you must be able to demonstrate that your capital has not reduced as a result of the gift.
Trusts
The alternative option is to consider setting up a trust. This could protect your assets from third parties and any income generated can help to fund the school fees for the beneficiaries, even after your death.
You may be able to gift cash, investments or assets with a value up to £325,000, if you have your “nil rate band” available (the amount you are permitted to have inheritance tax free), and this will not trigger a lifetime inheritance tax charge.
This money can then be invested to earn an income and the trust can then use this trust income to pay the school fees. The income is taxed at 45% and this tax credit is paid to the beneficiaries with the income.
If the beneficiaries have their personal allowance available, or they are basic rate taxpayers, they will be able to claim some of the tax paid by the trust back from HMRC.
Advice should always be sought before taking steps regarding any of the above. If you’d like any assistance with planning how you will provide for your grandchildren’s school fees or any other inheritance tax matters, please don’t hesitate to get in touch with your usual BHP contact or call 0333 123 7171.
