Grandparental Settlements for Private School Fees: A Tax-Efficient Solution

Private education is a cherished aspiration for many families, but the substantial cost of private school fees can pose a significant financial burden. To ease this burden, grandparents often consider making financial contributions to cover their grandchildren’s educational expenses. However, to maximize the financial benefits of such contributions, a well-structured trust arrangement can provide a tax-efficient solution.

The Role of Trusts

Trusts have long been an integral part of estate planning and wealth management. A discretionary trust allows the settlor (in this case, the grandparents) to appoint trustees to manage the trust fund and make decisions regarding the distribution of income and capital among the beneficiaries (the grandchildren).

The Tax Advantage

The tax advantage of using a discretionary trust for private school fees lies in the ability of the trustees to distribute trust income to children who are not likely to be liable for income tax due to their age and non-working status. Children in the UK are entitled to an annual income tax allowance, which, for the 2022/2023 tax year, stands at £12,570. This allowance means that income received by children up to this threshold is typically not subject to income tax. Beyond that, they will have a basic rate threshold to apply to their income; a threshold likely to be unavailable to working parents or grandparents who are in the position of being able to gift significant capital funds.

How It Works

Grandparents establish a discretionary trust for the benefit of their grandchildren, appointing trustees to manage the trust’s assets and income. The trustees could be themselves, their children or professionals. The gifted assets are usually in the form of cash but could equally be property or investments. The income subsequently generated from these assets would initially be subject to trust rates of tax but when distributed net to a non-tax payer or basic rate tax payer, a rebate is available. This rebate, when used to pay school fees, essentially results in the fees being paid by gross income and a saving of the value of the tax liability.

The following key points illustrate how this tax-efficient arrangement functions:

Income Distribution: The trustees have the discretion to distribute income to the beneficiaries (the grandchildren). This can be done in a manner that takes advantage of the children’s income tax allowance.

Tax Efficiency: Since the beneficiaries are unlikely to have significant other sources of income, any income distributed to them within their annual allowance remains untaxed.

Income Tax Rebate: The grandparents may also benefit from a tax saving due to their income being as a consequence of the gift. This can lead to further tax savings for the family.

Payment of School Fees: With the trust distributing income to the grandchildren, the school fees can be paid directly from the trust’s gross investment income. This is in stark contrast to parents who would need to use their net income after paying income tax.

Considerations and Legal Framework

It’s important to note that setting up a discretionary trust for the purpose of paying private school fees requires careful consideration and adherence to legal and tax regulations. The settlement must be genuine and made by the grandparents with the grandparents’ own funds – parental settlements do not carry the same tax treatment.

Moreover, the trustees must act in the best interests of the beneficiaries and exercise their discretion prudently. Trustees also have an obligation to manage the trust assets wisely to ensure there is sufficient income to cover the school fees.

Conclusion

Grandparental settlements for private school fees, facilitated through a discretionary trust structure, can offer substantial tax benefits. By distributing income to the children within their income tax allowances, the school fees can be paid from gross investment income, which is a far more tax-efficient approach compared to parents paying school fees from their net income.

However, it’s crucial to consult with a qualified solicitor or financial advisor to ensure that the trust structure is established correctly and complies with all legal and tax regulations. This tax-efficient solution can significantly alleviate the financial burden of private education, making it an attractive option for many families.

For further information or to discuss putting a discretionary trust in place, please contact the Price Slater Gawne Wealth Protection team on 03333 058375 or by email to WealthProtection@psg-law.co.uk