1st July 2024 | Arthur Byng Nelson | VAT Law, Trusts, Inheritance Tax

This note is intended for individuals who would like to understand more about how they could help family members who might be facing a sudden increase in school fees.

What is the current position on VAT and school fees?

Under existing VAT law, education and goods and services closely related to education such as accommodation, catering, transport are all exempt from VAT. As charitable institutions independent schools also receive 80% relief on business rates.

What are Labour’s plans?

Labour has stated that if elected it intends to introduce new laws which would remove both the VAT exemption and the business rates relief with the likely effect that school fees will significantly increase. In answer to a question we have received frequently: yes this will affect tuition fees and boarding fees. Secondly, no, in our view payment of multiple years’ fees in advance will not get around the issue.

How can I help?

The most straightforward method is for you to make outright gifts of cash to the family member in question. These will be treated as potentially exempt transfers (PETs) for Inheritance Tax. Alternatively, you could transfer cash directly to the school. It is believed (though less clear) that HMRC will also treat such transfers as PETs.

What is a PET?

This question is relevant for the assessment of Inheritance Tax. Gifts of cash by individuals to other individuals are not chargeable to Inheritance Tax at the time the gift is made but are potentially chargeable if the donor dies within seven years of the gift. In short, if you wish to avoid Inheritance Tax on the gift, you must survive it by at least seven years.

What if I do not survive seven years?

If you die within seven years of making the gift then the sum will become chargeable to Inheritance Tax together with the rest of your estate. The rate at which tax is charged on the gift will depend on whether the sum gift(s) exceed the nil rate band and how long you survive after making it. For more advice do contact us.

Are there any other ways?

If you can afford to redirect some of your regular income to your family member on a regular basis (while retaining enough to maintain your usual standard of living) then such regular gifts of income are exempt for Inheritance Tax purposes, whether or not you survive them by seven years.

Anything else?

Use your annual exemption. Everyone may give away £3,000 in a year without it being brought into assessment for Inheritance Tax, and any unused part of this exemption can be rolled over into the following year (but only once).

What about trusts?

Trusts remain a very useful tool for a number of reasons but in this instance they do not provide any particular magic wand. If you have lots of surplus capital and you want to reduce the Inheritance Tax that may be payable when you die, you could consider settling some of it on a discretionary trust for your family. You can give away or settle up to £325,000 every seven years without incurring any immediate charge to Inheritance Tax. You will definitely need to take specialist trust and tax advice before doing this, but we can help with that.

Are there any other taxes I should be aware of?

Capital Gains Tax is a possibility but if the gifts are in the form of cash then Capital Gains Tax is not relevant.

Any final points?

Ensure that your will is up-to-date and that you have Lasting Powers of Attorney in place. We say this to all our clients.

Did you know that if you leave 10% of your estate in your will to charity then the rate of Inheritance Tax that applies on your remaining estate is not the usual 40% but the lower rate of 36%? You might even consider giving some or all of that 10% to a charitable educational establishment to help them ride the VAT storm. And/or why not make a charitable gift now and see its benefit in your lifetime rather than leave it until after your death?

This publication is a general summary of the law at the time of publication. It should not replace legal advice tailored to your specific circumstances.

If you would like to find out more, please email Arthur Byng Nelson.

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