It’s that time of year again, when parents start to think about their children returning to school and if, like many people, you’re looking for a tax efficient way to pay school fees, and have concerns about Inheritance Tax (IHT), we may be able to help.
There are a few ways you can plan for school fees and the earlier you start, the better. We asked Cindy Chaplin from specialist medical accountants Larking Gowen to tell us more.
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Discretionary trust
A grandparent can add a sum of up to £325,000 to a trust without an IHT charge (assuming no gifts in the last seven years). The trust fund can provide an income and/or capital that can fund future school fees.
Income payments from the trust are paid net of income tax to the grandchildren. The grandchildren can then reclaim part, or all the tax paid by the trustees via their personal allowances.
A parent can do something similar, but because any income cannot be paid out of the trust until the child is over 18 years of age, it would be more suitable for higher education fees.
Business and agricultural assets
You can add more value than £325,000 to a discretionary trust if you have relievable assets, such as private company shares or agricultural property that are likely to give the trustees an income source.
There is no IHT on setting up the trust if the assets qualify for 100% relief and chargeable gains can usually be held over.
Provision for dependant relatives
It’s possible to transfer assets to a trust for dependant relatives tax free, provided that the trust doesn’t continue beyond the completion of the children’s full-time education.
Transferors must be able to convince HMRC that the amount set aside isn’t excessive. Excessive amounts won’t get the benefit of tax relief and will be taxed as chargeable transfers.
School fees plans
These are investment schemes designed to provide for school and higher education fees. They can be funded out of surplus income if preferred. The downside is that the value of investment plans can go down as well as up, so these can be risky. Plans need funds to be invested as soon as (or even before) a child is born to get the best return. However, there is no guarantee what the return will be and it may not cover the fees when required. Tax can be onerous if the plan is cashed in early.
Accountants don’t advise on this type of plan but an IFA can.
Contact Larking Gowan here.
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