The Labour Party’s Manifesto commitment to impose VAT on private school fees, means there is increased significance now for wealth transfer planning, says Quilter.
As the political landscape shifts towards policies that could substantially impact the cost of private education, Quilter believes more grandparents will be urged to proactively use the annual gifting allowance to help fund grandchildren’s education.
According to School Guide, the average school fee for a day pupil in the UK is £15,655, which will rise to £18,786 if a further 20% VAT is due in next school year. This equates to a £3,131 increase, which could be nearly met by a grandparent’s annual gifting allowance of £3,000 per annum.
If a grandparent had not used their tax-free gift allowance within the previous tax year, then it rolls over into the next year enabling a grandparent to gift up to £6,000 without creating a potential inheritance tax liability.
The gifting allowance is one of the longest frozen tax allowances, with the current £3,000 limit being in place since 1981. If Labour is to win the next general election, Quilter believes the party should increase the annual gifting allowance to allow more wealth to flow down the generations. If the allowance had tracked inflation, it should now be over £11,000.
As well as improving intergenerational wealth equality, increasing the allowance could also potentially alleviate some of the pressure the state schooling system is expected to face.
Commenting, Rachael Griffin, tax and financial planning expert at Quilter, said: “For many parents a 20% increase in the cost of private schooling will simply be a financial step too far. This could lead to thousands of school children leaving private education and joining the state system. Many grandparents can utilise their wealth to help keep their grandchildren in private education while also mitigating their inheritance tax liability.
“For older grandparents utilising just their tax-free gift allowance may be sensible but younger grandparents, who feel they have more than enough wealth to live on, could consider gifting over and above the limit.
“A gift of over £3,000 could be liable to IHT if their estate upon death is over the nil rate band threshold of £325,000 and is made less than seven years before their death. However, for many parents and grandparents seeing their wealth in use in the years before their death is preferable then passing it on afterwards.
“Whether you think Labour’s plan to remove the tax breaks on private school fees is right or wrong, grandparents can make a very real difference to their grandchildren’s lives by utilising the outdated but still useful gifting allowances available.”
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