Recently, there’s been publicity in the press about firms of accountants and advisers who’ve been marketing tax planning schemes to help parents fund the costs of private school education.
These schemes will typically involve grandparents acquiring a separate class of shares in the family company at below market value. The shares can then either be gifted into trust or held on ‘bare trust’* for the benefit of the minor children (under 18 years old). A dividend can then be declared on these shares to help fund the school fees. The tax payable by the children on the dividend received is much lower compared to if a dividend had been paid on the shares directly owned by the parents or grandparents.
Unfortunately, these types of arrangements are caught by well-known anti-avoidance provisions. Given the recent publicity and widespread use of such schemes, HMRC has released a Spotlight to highlight that these arrangements do not work:
Dividend diversion scheme used to fund education fees (Spotlight 62) – GOV.UK (www.gov.uk).
You might be lucky enough to have parents with wealth and assets that they want to pass to their grandchildren. As part of their estate and inheritance planning, their assets can be settled on trust or gifted to help fund the costs of schooling.
However, with the cost of school fees rising, it’s understandable that parents and family members might look at alternative ways to pay school fees in a tax efficient way. There are actually various options and tax reliefs for parents to help fund school fees. So, there’s no need to resort to tax avoidance schemes like those marketed by certain firms.
Simple but effective planning options include:
- Investing in Venture Capital Trusts (VCTs) – dividend income received from VCTs is exempt from income tax, which can then be used to fund school fees. In addition, 30% income tax relief on up to £200,000 of a qualifying investment is also available.
- Investing in a qualifying life assurance policy – investors can take up to 5% tax-deferred withdrawals from the policy, which can be used to help fund school fees. Depending on the nature and terms of the life assurance policy, there can also be associated inheritance tax benefits for the policy holder.
- Making use of your children’s junior ISA allowance (£9,000 p.a.) – allows you to invest funds to help pay for future fees. Or use the returns (income and capital) that are tax free from your own ISA allowance (£20,000 p.a.) to help fund the cost of school fees.
Given the nature of these investment products, we recommend taking investment advice from an independent financial adviser.
There are various options to fund school fees in a tax efficient way without having to resort to tax avoidance schemes. Not only can they be costly to set up, they’ll be costly in the long run should HMRC raise an enquiry.
If you have a question about trusts or help with a HMRC tax enquiry, drop us a line for a chat at mail@ct.me or contact one of our Personal Tax team.
Author: Joshua Williams, CT: Personal Tax
* Trusts and taxes: Types of trust – GOV.UK (www.gov.uk)
However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary. Bare trusts are often used to pass assets to young people – the trustees look after them until the beneficiary is old enough.
