In this analysis, Alice Edwards, Associate, at law firm Winckworth Sherwood, highlights some unintended and unwelcome consequences that might arise in cases where grandparents are picking up the tab for their grandchildren’s school fees.
With the hike in school fees following the government’s decision to impose VAT from the start of this year, more young families than ever will be looking to grandparents for help.
For asset-rich retirees, the benefits of contributing to school fees are numerous, allowing them to:
- ease the financial pressure on their own adult children, who may have been struggling in recent years with higher mortgage rates and living costs;
- see the educational and extra-curricular benefits that a private school can provide for their grandchildren;
- cut their own Inheritance Tax (IHT) liability on death by reducing the value of their estate (broadly speaking, gifts made more than seven years before death will be free of IHT); and
- provided the correct structure – such as a bare trust – is used, take advantage of the income tax benefits that arise from the fact that income will be taxable on the grandchild, meaning that income produced will benefit from that child’s personal allowance.
However, grandparents should give the matter careful thought before making any commitment, as there may be unintended and unwelcome consequences.
Potential IHT implications
Payments made towards school fees are likely to be classified as gifts for IHT purposes. Unless these payments qualify as gifts made out of “surplus income”, the criteria for which are extremely strict, they will be subject to IHT if the grandparent passes away within seven years of making the gift, as above. (This “tax tail” may be even longer if trusts are involved, so specialist advice should be taken.)
The tax is payable by the recipient in the first instance, which may leave young families scrambling to find the cash in the event of a grandparent passing away unexpectedly.
Only the annual exemption of £3,000 per donor (plus some other small exemptions) are automatically free from IHT.
Impact on financial security
When a grandparent agrees to help with school fees, they are potentially making a long-term financial commitment.
Fees are likely to continue to increase as a result of schools’ rising costs and the lasting impact of the VAT charge, and grandparents may underestimate the long-term financial outlay.
They need to consider their own vulnerability to unexpected life events, such as medical issues or the death of a partner. In particular, good residential care can be prohibitively expensive, and grandparents should be wary of compromising their own quality of later life for the sake of their grandchildren.
Impact on family dynamics and dependency
Unless clear boundaries are agreed from the outset, paying school fees could unintentionally create expectations or feelings of dependency in children or grandchildren.
Parents and grandparents may have differing views about the schools that are chosen or the way the funds are used, which may lead to one party resenting the other, or outright disagreement.
In addition, tensions can arise if contributions are uneven between grandchildren, leading to perceptions of favouritism and strained family relationships.
Risk of “deprivation of assets” claims
If grandparents later require means-tested care, significant financial contributions towards school fees may be seen as a deliberate deprivation of assets.
Local authorities could assess such contributions as an attempt to avoid paying care costs, potentially affecting eligibility for state support.
In conclusion: Give generously, but wisely
While grandparents’ wishes to support their grandchildren’s education come from a place of kindness and generosity, contributing to school fees can create financial, legal and familial challenges that they may not have anticipated. Seeking advice from a legal or financial professional can provide grandparents with the means to mitigate some of these effects, or to explore alternative options that enable them to help their grandchildren without compromising their own interests.
