It is becoming increasingly common for grandparents to make contributions towards their grandchildren’s private school fees. This could be payments towards private education fees or payment of extra-curricular activities or trips.
For many, these payments would be viewed as a ‘gift’ more formally known as a Potentially Exempt Transfer (PET). A PET carries a seven-year window and if you survive this period from making the ‘gift’ it’s value is ignored when calculating your available taxable allowances on death. This has inherently been used as a great Inheritance Tax planning tool.
It is a common misconception that payments by a grandparent towards school fees will always be treated as a PET. However, where payments are made directly to the school, these payments will in fact considered by HMRC as a Chargeable Lifetime Transfer (CLT). The impact of this is that there could be an immediate trigger to Inheritance Tax at 20% to the extent that any allowances are exceeded, and interest/penalties may arise if this isn’t properly declared and paid.
An immediate payment to HMRC will occur if payment for the school fees is in excess of the giver’s available Nil Rate Band (currently up to £325,000 subject to any earlier CLTs in the last seven years).
For most this will not be an issue, but it will affect those who are intending to make a large upfront payment for their grandchildren’s school fees.
There is scope for these payments to be structured as regular gifting out of surplus income (which falls outside the scope of the Inheritance Tax charge) or for them to be treated as a PET should payments instead be given to the grandchild’s parents as a gift, with a non-binding intention that they use the funds to pay the school fees. This is because the payment would instead be treated as a gift to the grandchild’s parents and there would be no obligation for the parent to apply it towards school fees.
Should you think that this may be relevant to you, and want to discuss this further, please give the Probate Team a call on 0345 646 0406 and a member of our team will be in touch.