Grandparents to the Rescue: A New Way to Tackle School Fees and Inheritance Tax

While the cost of education is constantly on the rise, many families are finding creative ways to manage their finances. One such method is emerging as a popular choice among grandparents who wish to contribute to their grandchildren’s education while also navigating the complexities of inheritance tax. Inews explored this trend through the story of Zoe van der Linden and her family.

The Dilemma of Private Education Costs

Zoe van der Linden, a 40-year-old senior manager at a fintech firm, faced a tough decision about her daughter Eva’s education. Despite her personal beliefs in equal access to education, Zoe recognized her seven-year-old daughter’s exceptional academic abilities and pondered over the idea of private schooling. However, the steep costs of private education posed a significant challenge.

Together with her husband Hugh, a financial planner, Zoe considered various options. They both had good incomes, but the fees were still a stretch. They then turned to Zoe’s mother, Helen, for help.

Grandparents Stepping In

An increasing number of grandparents, like Helen, are now stepping forward to cover their grandchildren’s school fees. This trend is driven by the dual pressures of rising private school costs and general inflation. Zoe and Hugh, contemplating this route, consulted their financial adviser at Old Mill.

In the UK, the average fees for day pupils in 2022-23 were £15,655 per year, and about £37,000 for boarders. Such amounts can significantly impact a family’s finances, especially with concerns about job security.

The Tax Implications

This is where tax implications come into play. Jonathan Orchard, a chartered financial planner, explained that while grandparents’ financial support is invaluable, it can have unintended tax consequences. One efficient solution is setting up a family trust.

What is a Family Trust?

A family trust is a legal arrangement allowing a person to gift money for someone else’s benefit, with a trustee overseeing the fund. This setup not only secures assets but also offers a way to manage personal tax burdens effectively.

In Helen’s case, she opted to establish a trust, funding it with her savings and self-invested personal pension (SIPP). This approach meant the money, previously liable for higher income tax rates, could now be used more efficiently for Eva’s education.

Inheritance Tax and Trusts

A crucial advantage of this method is its impact on inheritance tax. If Helen lives for another seven years, this financial gift will be exempt from inheritance tax, which is typically 40% on estates worth more than £325,000.

Furthermore, the trust ensures that Eva’s school fees will be covered, regardless of her parents’ financial situation. It’s a safeguard against uncertainty, ensuring continuity in education.

The Cost of Private Education

The total cost of private education can vary significantly. Zoe estimates that if her mother covers the fees throughout Eva’s schooling until Year 13, the total could exceed £200,000, depending on the chosen school and its fee structure.

The Benefits of a Family Trust

Jonathan Orchard highlights several advantages of using a family trust for school fees:

  • Tax Advantages: Trusts can reduce inheritance, income, and capital gains tax.
  • Flexibility: They allow for structured distributions for specific expenses like school fees and trips.
  • Asset Protection: Trusts safeguard funds from potential financial disputes.
  • Continuity: They ensure uninterrupted support for a child’s education, even if the donor faces personal challenges.
  • Educational Legacy: Trusts can fund education for future generations, preserving a family’s commitment to learning.
  • Long-term Planning: They allow families to set aside funds in advance, easing financial pressure when it’s time to pay for education.

In summary, as families like Zoe’s navigate the complexities of education costs and tax planning, family trusts emerge as a strategic solution, balancing financial prudence with the desire to provide the best possible education for their children.