Lump sum payment of school fees, IHT?


Lump sum payment of school fees, IHT?

Postby Feds on Wed Sep 14, 2011 11:34 am

My client wants to fund £100,000 of school fees for his Grandchildren. This will be an up front lump sum "payment" and will cover fees for 3 years.

Ignoring the £3,000 exemption, I am struggling to ascertain whether the HMRC will deem this to be a "Gift" (PET or otherwise), or whether it would be "exempt", perhaps on the basis that the donee's estate has not increased.

Essentially, we need to know whether this is exempt for IHT or not?

Thanks
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Re: Lump sum payment of school fees, IHT?

Postby tax_schmax on Wed Sep 14, 2011 12:58 pm

It is not exempt from IHT. It is a gift. Does the school get this money all at once? It sounds like it will be a PET.

If the funds are to be invested then surrendered gradually, i.e. each term or annually, the use of a bare trust can often be useful in such cases. HMRC allow the gains under a bare trust to be assessed on the minor beneficiary, even for offshore life assurance bonds.
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Re: Lump sum payment of school fees, IHT?

Postby section 44 on Wed Sep 14, 2011 1:13 pm

Feds wrote:perhaps on the basis that the donee's estate has not increased


Wouldn't the debt owed by the school have value?
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Re: Lump sum payment of school fees, IHT?

Postby Feds on Wed Sep 14, 2011 3:20 pm

Hi thanks for that.

The points you raise are all valid.

The £100,000 would be paid up front all at once for 3 years fees. This way, there is a discount on the price.

I see the point about the debt owed and can see how this could add value to the estate.

I guess wiht a lot of things, there doesn't appear to be any clear answer to this.
I thought it might be exempt as it was for the purposes of "eduction and maintenance"
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Re: Lump sum payment of school fees, IHT?

Postby tax_schmax on Wed Sep 14, 2011 4:11 pm

The exemption for maintenance and education is for your children or step-children only.

There are lots of clear answers, but many wonderful shades of grey.
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Re: Lump sum payment of school fees, IHT?

Postby maths on Wed Sep 14, 2011 8:24 pm

The answer depends upon the structuring.

If the grandparent simply contracts with the school to pay for the 3 years education of the grandchildren this would constitute a chargeable lifetime transfer (CLT) and not a PET. This is because no property becomes comprised in the estate of the child nor does the child's estate increase in value (s3A(2)).

If the parents contract with the school and the grandparent discharges the parent's indebtedness to the school the grandparent has made a PET (parent's estate is increased due to no requirement to discharge the liability incurred).

The grandparent could gift to the grandchild on a bare trust (a PET) with the trustees utilising the monies to educate the child (care needed re TA 1925 s 32).
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Re: Lump sum payment of school fees, IHT?

Postby maths on Wed Sep 14, 2011 8:28 pm

Bit missing.

Grandparents gift to parents (a PET). Parents contract with school and utilise s11 (disposition for family maintenance) ie an exempt transfer.
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Postby Feds on Fri Sep 16, 2011 9:02 am

Very useful. Thanks all.
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