MAKE SCHOOL FEES LESS TAXING
Having enjoyed our great British summer and spent quality time with your children, perhaps it’s a good time to consider that expensive topic of school fees now they’re now back at school.
There is no specific tax relief for school fees but the application of general tax planning can definitely help in this area.
Most people know that if you transfer income to your children, then it will be taxed on you until they are 18. However, such rules do not apply to income provided by other members of the family. The most common situation is usually grandparents.
You can consider the situation where the grandparents have investment income – or maybe income from dividends in a personal company – which is taxed at the higher rates of 40% or 45%. The net income, after this high level of Income Tax, is then put aside, and their capital grows and so creates a larger estate. This eventually leads to be ‘double whammy’ of a larger Inheritance Tax bill at 40% in due course.
It is unlikely that either you as parents or the grandparents would be comfortable with large levels of capital, or shares in a profitable company, being directly held by your children.
So, you would usually build in the protection of transferring the assets to a discretionary trust, with you or the grandparents as trustees, and the children as beneficiaries. This gives the children no rights to the assets, and the trustees would pay the school fees out of the trust income.
The tax calculations are complicated, but in the end, as the children use their personal tax allowances and lower rates of tax, there are sizeable savings.
EXAMPLE: Granddad Joe has £40,000 of dividend income from his personal company, which he pays around £11,000 in Income Tax on. He gifts the shares to a discretionary trust, and he and his son Steve are trustees. The trust pays the net income out to Steve’s 2 children each year to pay their school fees, and their net tax bill is less than £4,000 in total, an annual tax saving of over £7,000.
Tax is a complicated area as you can see from the example above and it’s always wise to seek professional advice so call Des on 0800 019 1744 or email firstname.lastname@example.org and we’ll make an appointment for you to discuss this in more detail.
Author: Andrew Wilshaw
Director & Tax Specialist at Barringtons Chartered Accountants