Grandparents considering paying private school fees for their grandchildren could encounter potential financial pitfalls, says Winckworth Sherwood.
With the Government’s decision to impose VAT on school fees, more families may be turning to grandparents to help. For asset-rich retirees, contributing towards school fees could help ease the financial pressure their own children face, while allowing them to cut their inheritance tax liability on death by reducing the value of their estate.
However, Winckworth Sherwood said grandparents may encounter “unintended and unwelcome consequences” by choosing to help.
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”, they will be subject to IHT if the grandparent passes away within seven years of making the gift, the law firm said. The tax is payable by the recipient in the first instance, which may leave families scrambling to find the cash in the event of a grandparent passing away unexpectedly.
If a grandparent later requires means-tested care, significant financial contributions towards school fees may also be seen as a deliberate deprivation of assets and local authorities could assess such contributions as an attempt to avoid paying care costs.
The firm also warned of the ongoing commitment of school fees and the impact on financial security. Fees are likely to continue to increase as a result of schools’ rising costs and the lasting impact of the VAT change and grandparents may underestimate the long-term financial outlay. They should consider their own vulnerability to unexpected life events, such as medical issues, the death of a partner and their own potential care costs.
Alice Edwards, associate at Winckworth Sherwood, said: “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.”
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