Question: How can grandparents help pay for private school fees in a way that is tax efficient and reduces inheritance tax?
Answer: Private school fees continue to rise across the UK. Average day school fees are now around £22,000 per year, which places pressure on many families. If you are a grandparent with savings or surplus income, you may be able to help. With the right planning, your support can also reduce the size of your taxable estate for Inheritance Tax (IHT) purposes.
Below, Daniel Barrett, Chartered Financial Planner, explains the main options under current UK rules.
Why is this relevant for Inheritance Tax?
IHT is charged at 40% on anything you leave above your available allowances, such as the nil rate band and the residence nil rate band. In practical terms, every £100,000 above these thresholds could result in a £40,000 tax bill.
Many grandparents prefer to support their family during their lifetime. If gifts are structured correctly, they can reduce the value of your estate and therefore the potential IHT due in the future.
Can grandparents pay school fees without creating inheritance tax issues?
Yes. Gifts can often be made completely tax free if they fall within HMRC’s existing exemptions. The two exemptions most commonly used for school fee planning are outlined below.
1. The £3,000 Annual Exemption
Every individual can give up to £3,000 per tax year free of IHT. This can be given to anyone, including a grandchild, and does not need to relate to education.
- You can carry forward any unused annual exemption for 1 tax year.
- A couple can therefore give £6,000 each year, or up to £12,000 if both carry forward the previous year’s allowance.
These gifts fall outside your estate immediately.
2. Gifts Out of Normal Expenditure
This exemption is often the most flexible and can allow larger gifts to be made.
If your income is higher than your usual living costs, the surplus can be gifted free of IHT, provided the gift:
- Comes from income rather than capital
- Is regular, or shows a clear intention to be regular
- Does not reduce your normal standard of living
Income might include pension payments, rental income, dividends or interest.
As long as you can show that you have surplus income and that your lifestyle is unaffected, these gifts fall outside your estate straight away. There is no 7-year rule for this exemption.
What does this look like in practice?
Margaret and John, both in their late-60s, have one daughter, Sarah, who has a young son, Oliver. Sarah and her partner both work full time, but the rising cost of private school fees has become increasingly difficult for them to manage. They want to keep Oliver at the school he loves, but the annual fees of £22,000 are a significant strain on their household budget.
Margaret and John have:
- Savings of £500,000
- Combined pension income of £60,000 per year
- Living costs of approximately £46,000 per year
This gives them more than £14,000 of surplus income each year. They would like to support Sarah and her partner by helping to cover Oliver’s school fees, while also reducing the value of their estate for future IHT purposes. Margaret and John have watched Sarah and her partner work hard to give Oliver the best start in life, and they can see the increasing pressure that rising school fees place on their budget. By stepping in with regular support, they feel reassured that Oliver can continue thriving at the school he loves, while also giving Sarah and her partner some muchneeded financial breathing room.
Their gifting plan
They decide to contribute to the school fees using:
- £6,000 from their combined annual exemptions
- £14,000 from surplus income
Total support: £20,000 per year
Impact on Inheritance Tax
Over 10 years Margaret & John, would gift £200,000. If this amount remained in their estate and was taxed at 40%, the family could eventually lose £80,000 to IHT.
Because their gifts fall within HMRC exemptions, the full £200,000 is outside their estate. This reduces their potential IHT liability and supports their grandson’s education.
What if grandparents wish to give more?
Larger gifts can still be made. Any gift that does not fall within the annual exemption or the gifts-from-income rules is treated as a Potentially Exempt Transfer (PET).
A PET becomes fully exempt from IHT once you have survived 7 years from the date of the gift. If you die within 7 years, the gift may use part or all of your nil rate band.
For more detail, please see our article Saving Inheritance Tax – How Lifetime Gifting Can Protect Your Wealth.
Key points to remember
- Gifts using the £3,000 annual exemption leave your estate immediately.
- Gifts from surplus income can remove larger amounts from your estate, provided they are regular and funded from income and don’t reduce your standard of living.
- Larger gifts can still be efficient, provided you survive for at least 7 years.
- Clear records are essential. HMRC will expect evidence of income, expenditure and the intention behind the gifts.
Final thoughts
Helping with private school fees can be a rewarding way to support your grandchildren. When structured correctly, it can also make your estate more tax efficient.
Daniel Barrett is a Chartered Financial Planner specialising in pensions and retirement planning, investments and inheritance tax planning. If you would like to speak to Daniel about your financial planning, you can book a free, no-obligation discovery meeting here.