My daughter has asked if I can help pay for her son’s private school fees as she is struggling with higher mortgage rates and increased cost of living. I am in a position financially to help, but is there anything I should think about before I say yes? For example, would this impact inheritance tax? Second, how best should I structure the payments? And how would I deal with questions from my other children?
Alice Edwards, associate at Winckworth Sherwood, says that with VAT imposed on school fees from the start of the year, many grandparents will receive similar requests. Helping with school fees can be a sensible way to benefit your family during your lifetime, when you can see the impact of your generosity in action. However, it is important to think carefully before committing, as there are a number of potential pitfalls.
In terms of Inheritance tax (IHT), HM Revenue & Customs is likely to classify payments towards school fees as gifts, meaning that if you die within seven years of making a payment, they will be subject to tax. The starting rate for IHT is 40 per cent for anything above the nil rate band, currently at £325,000 per person, although this tapers once three years have passed from the date of the gift. The IHT is payable by the recipient in the first instance, meaning your daughter could be left with a tax demand from HMRC when you pass away.
If you currently have a high level of income, you might consider the exemption for regular gifts made from “surplus income”. However, this exemption is complex. To qualify, the gifts must come out of income, not capital, and must not affect your quality of life. For example, if your gift comes out of income and you then have to dip into capital to meet your normal living expenses, the exemption won’t apply.
Separately, do not forget your £3,000 annual exemption, which enables you to gift this amount (in total) free of IHT during each tax year. You can carry any unused annual exemption forward to the next tax year — but only for one tax year. On structuring the gift, the simplest option would be to give the funds to your daughter (either as a lump sum or in increments).
Another option would be to pay into a bare trust in your grandson’s name. This means that any income would be taxable on your grandson, and would therefore benefit from his personal allowance of £12,570, which may otherwise be unused. Alternatively, if you wished to retain some control over the money, you could consider a discretionary trust. Setting up trusts of any kind has particular tax implications, so it is important to take professional advice if you are considering this.
When considering the family dynamics, you are right to think about how your other children might feel about what is likely to amount to a significant gift to your daughter and her son. We usually advise parents to treat their children equally, unless there is a compelling reason not to, and even if your other children aren’t struggling in the same way as your daughter, they may expect you to equalise things further down the line.
How can we spring clean our finances?
The new tax year is fast approaching and my family is following through on a new year resolution to stay on top of our personal finances. What should be on our spring cleaning checklist?
Nicky Owen, partner and head of professional practices, at tax firm Crowe, says with the end of the tax year just around the corner, now is the ideal time to take stock of your finances and explore tax planning opportunities for you and your family. There are six key items that I would recommend you consider before April 5 to become a more tax-efficient family.
First, think about whether you are optimising your savings by fully utilising yours and your family’s Individual Savings Account (Isa) allowances. Isas, which, allow up to £20,000 to be saved in one, or multiple accounts over the tax year, are a valuable tool for tax-efficient investing as you won’t pay tax on income or capital gains earned from an Isa. Remember, on one Isa, such as the Lifetime Isa, the government will even add a 25 per cent bonus payment based on what you put in. However, only those aged between 18 and 39 years old are eligible to open a Lisa and they can be used for savings used towards a first home or retirement.
Second, think about pension contributions for all the family, including children and grandchildren. A pension contribution of £2,880 can be made and HMRC will top it up to £3,600. That’s building a pension pot for the next generation.
For those working, personal pension contributions can be made up to the working person’s standard annual allowance, which is up to £60,000. The amount contributed is net of basic rate tax, and the pension provider will claim the basic rate tax from HMRC. No one knows how long the current rules and income tax relief will continue, so it’s a good idea to consider seizing these opportunities while you can. The annual allowance will be as low as £10,000 for those on very high incomes or who have taken taxable cash from a flexible pension.
The third thing to consider is making use of your annual capital gains tax allowance of £3,000 by selling and buying back stocks and shares. You will need to delay the buy back by 30 days or have a partner, or your Isa, repurchase the shares.
Fourth, think about charitable giving and, if you are a taxpayer, always tick the Gift Aid box. This enables the charities to reclaim an extra 25 per cent of the donation from HMRC.
Finally, consider other allowances, such as trading and property allowances of £1,000 each — these will cover sales on eBay, Amazon and rentals of driveways for parking. Also, expenses that employees can claim, professional subscriptions, business mileage and working from home.
Our next question
I run a business in the UK with my two siblings — it is very important to us, both financially and personally. Our plan had always been that when one of us passes away, the business would be left to the two surviving siblings. However, with the proposed tax reforms kicking in next year, we now face the very real prospect of having to sell the business when one of us dies if we cannot find a way to fund the inheritance tax. What are the best options available to us?
If you are still searching for ways to invest tax efficiently after all this then consider tax-efficient investments, Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS). These have varying investment thresholds and reliefs, so it’s essential to determine which work best for you.
The 2024 Autumn Budget announced that pensions will fall within the inheritance tax (IHT) remit from April 2027 and restrictions will be also made to Business and Agricultural Property Reliefs. These three changes will have a real impact on how families will pass businesses and wealth to the next generation free of IHT. It is therefore time to reflect on wills, lifetime gifts, the setting up of family trusts and companies.
Taking action now will enable you to benefit from your allowances and contributions this tax year and set you up for the years to come.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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