08 May 2013
Taking a lesson in tax efficient school fees
For many individuals, being able to play a significant role in the education of future generations of their family is really important. A contribution towards a grandchild’s school fees can be a lasting gift and one which will be appreciated for years to come.
However, making such a generous gesture needs careful planning in order to avoid falling into the inheritance tax trap.
For example, some school fees can be in excess of £20,000 a term – or £60,000 a year. If a grandparent has given their own children this money to help with the grandchildren's school fees, but then the grandparent dies, these gifts are brought back into account when calculating the IHT due on their death.
It is usually gifts made in the seven years before a person's death that are taxed when a person dies. Over those seven years, the grandparent might have given more than £420,000. While this might be marginally better than the grandparent having kept the money, the gifts are still taxable and the donees will have to pay any IHT due on those gifts. In other words, it is not an ideal situation.
Craig Williams, practice group leader of the wills, trusts and probate team, says there are more tax-efficient ways for payments such as school fees to be made.
“There are several options available,” he said. “One is to pay some or all of the fees as gifts out of excess income, which would make all of the gifts completely exempt from IHT, regardless of whether the grandparent survives seven years or not. How this exemption works and the best way to persuade HMRC that the exemption applies is not at all obvious, but it can be done and it can save an enormous amount of tax. Over a number of years it could save over £100,000 of tax.
“Another option may be to consider an initial large gift of funds to the parents or a settlement of funds on trust for the children. The earlier the grandparent does this, the greater the chance they will survive seven years from the gift. A gift of this sort could become tax-free after the first seven years and deliver other tax advantages too.
“The key point is that a significant tax saving can be achieved simply by doing something differently and this example shows the value of taking professional advice. Of course, each individual’s circumstances are different and what may work in one situation may not be appropriate in another, which is why we always advocate a personal review.”
A key point, he says, is to take a balanced approach to planning, deciding what needs to be achieved and then considering, with the help of an adviser, whether those goals can be reached in a more tax efficient manner. Regular reviews will ensure that maximum benefit is achieved as circumstances change during an individual’s lifetime.
Next month, our team will be leading a complimentary one-hour legal clinic on the topic of effective estate planning. The session is one of an ongoing series of events from B P Collins under the title “An Age of Opportunity”.
The event, to be held at Colston Hall, Gerrards Cross Memorial Centre on 11 June at 2pm, will include practical advice and highlight the key areas to consider when gifting to children and ways of ensuring they benefit to maximum advantage.
“We will be looking at issues such as what falls within the IHT net and what doesn’t; the ability to reduce IHT through gifts; how you can leave a legacy to an unborn child or grandchild; and considering whether physical assets such as jewellery, art or property are better to leave in a will as opposed to money,” said Craig.
“It’s an opportunity for anyone who has concerns about IHT and tax efficient giving to come along and ask questions of the panel and, if they wish, talk to us afterwards informally and confidentially about how we may be able to help.”
The clinics are open to all and are designed to enable members of the local community to gain a first-hand appreciation of the legal issues likely to affect them, their family or their friends at different stages of their life, as well as raise awareness of the steps that can be taken to plan for the future.