Use a trust to pay for your grandchildren’s school fees and save tax

You can set up a trust fund to help pay children’s private school fees and use their  own personal allowances. This is dependent on your personal circumstances, but where you have family owned companies spanning multiple generations, you can consider setting up a trust to facilitate payment of private school fees in a tax efficient way (and help with your inheritance tax planning too).


This will not only save you paying tax at rates of up to 45%, but can yield cash savings of over £6,500 per child, per year.


If this is something that you are interested in, then keep reading to find out if you are eligible to set up a private educational trust fund for your child.


What is a trust fund?


A trust fund is simply a way of holding money 'in trust' for the benefit of usually minor children. A trust fund can then be used to pay school fees and other things for the benefit of the trust's beneficiary(ies).


Educational trust fund


An educational trust fund is not a different type of trust - it's just a way of describing what the trust exists to do.


Given that trusts are often set up to fund school fees for children then they are often referred to as an educational trust fund, although they're not really any different from discretionary trusts.


A discretionary trust is where the Trustees have 'discretion' over how the income and capital of the trust is managed and used for the beneficiaries. This allows parents and grandparents to keep control of the underlying assets, but use the income generated from those assets for paying things like school fees.


Benefits


The main tax advantages of using a trust fund is that you can reduce your inheritance tax liability by gifting away surplus assets and save income tax in the family by using the children's own personal allowances.


If you are already assisting with payment of grandchildren’s school fees out of your own income or capital, then using a trust could be a more tax efficient way of paying the school fees. 


So rather than you paying out of your taxed income or capital, you could set up a trust for the benefit of your grandchildren and settle some income generating assets within. When income is earned by the trust, that is then treated as the grandchildren’s income and therefore uses the grandchildren’s personal allowances - currently £12,570 a year. 


If the source of the income they receive is dividends in a company, then they can get an additional £1,000 allowance too. And if the source of income is interest income, they could earn another £5,000 tax free on top too.


Children's private school fees are likely to be in the region of £15,000 a year at least, meaning that the majority of their fees could be paid by the trustees quite tax efficiently if you have these circumstances.


The trust income can also be used beyond paying school fees and can fund university fees when the child moves on.


Another advantage is that it also facilitate inheritance tax (IHT) planning for grandparents in a controlled way. Grandparents can gift capital into the trust tax free (up to their nil rate band of £325,000) and providing they survive 7 years then this capital will fall outside their estate for IHT purposes.


Disadvantages


There aren't many disadvantages apart from the fact that any income that goes into the trust can no longer be used by the original settlor's or trustees. Which basically means that you as the grandparents can't benefit from the funds or asset once they're in the trust.


That's not generally a problem though, as you can manage the amount of capital or value of the asset that gets put into the trust in the first place.


If you are, however, transferring an asset like property or cash then you would suffer an inheritance tax liability if the value of the transfer was over the inheritance tax tax free threshold of £325,000. This is known as lifetime inheritance tax and the tax paid rate is 20% over the nil rate band threshold.


How do I set up an educational trust fund?


In order to set up a trust fund in the most tax efficient way, grandparents need to identify the capital they are going to be transferring.For example this could be shares in a limited company, a property, cash or any other capital asset with an income source. It makes sense to transfer an income generating asset for maximum tax efficiency.


Let's take shares in a private limited company. These normally pay out income via dividends, so are a useful asset to transfer into a discretionary trust. The shares will however have a value if the company has been running for a few years.


Normally a transfer into trust would give rise to a capital gains tax charge, but there is a capital gains tax exemption available that you can apply for when the shares are in a trading company.


This means you can transfer shares in the company without paying any capital gains tax on the transfer - it is essentially deferred into the future.


As long as the shares are in a trading company then you should be able to avoid paying any inheritance tax as well on the transfer, which would otherwise be the case if you were transferring cash of property over the inheritance tax threshold of £325,000.


Who can set up an educational trust fund?


Anyone can set up an educational trust fund, however the tax treatment depends on who is making that initial capital transfer.


Where the capital transfer comes from a parent then there is anti-avoidance legislation that means the parent is taxed on the income, which means that there is not much benefit until the child reaches adult age i.e 18.


However if the capital transfer comes from someone other than a parent, then the income is treated as the child's and uses up their personal allowances. For example a grandparent using it to fund grandchildren's education.


Note: there is anti-avoidance legislation meaning that a trust cannot be set up indirectly by the parents for the benefit of their children - this would not result in any tax advantage and therefore the income would be taxed on the parents anyway. As such, always take professional advice to avoid falling foul of the legislation both in line with the letter and substance of the law.


FAQs


Can I pay private school fees through my company?


Just paying directly via your company would mean that you are taxed on the payments as if you had received salary of the same amount. This is therefore not really a tax efficient way or paying school fees as there is no corporation tax benefit. 


If your child is working for your business in some way for example carrying out some admin duties, helping on the weekends, assisting your with your social media marketing then you could pay them a reasonable salary commensurate with duties performed. This salary would be tax deductible and form part of the child’s personal allowance. Care must be taken however to ensure that the salary paid is commensurate with duties undertaken and not just a way of extracting funds without any work performed.


Apply for a call and we can talk about your personal circumstances to see if you could be structured more tax efficiently.


What assets Cannot be placed in a trust?


There aren't many assets that cannot be placed into trust, but you probably wouldn't want to place any non income generating assets into trust as there wouldn't be much benefit in doing so.


Any assets that you require to fund your own personal expenses shouldn't be put into trust, as you can no longer benefit from the income once the asset is transferred into trust.


What type of trust is a bare trust?


A bare trust is where you hold the asset on trust for the child until they reach the age of 18. Once they do, they are absolutely entitled to the asset which may not be a good idea particularly if the asset is a property or company shares.


Conclusion


If you are a grandparent that is already contributing towards paying private school fees or would like to do so as part of their inheritance tax planning, then you can use a family trust - also known as a discretionary trust or educational trust to help pay for private school or university fees tax efficiently.


As well securing inheritance tax savings for grandparents, there are also income tax savings by transferring income generating assets into a trust where children are the beneficiaries. This happens by using the children’s personal allowances - given that everyone in the UK has a personal tax free allowance from birth.


If you are part of a multi-generation family company or have grandparents that are willing to gift capital in a controlled manner to facilitate payment of private school fees, then get in touch to see how you could do so tax efficiently. Just fill in the form below to see if you’d qualify for a call.

Worldwide Disclosure Facility: Your Guide to Offshore Tax Compliance

By Reza Hooda • December 3, 2024
The Worldwide Disclosure Facility (WDF) is a program set up by HMRC to help people and businesses follow the rules for taxes on money from outside the UK. If you have income or money from other countries that you haven't told HMRC about before, this program gives you a chance to fix your tax situation and make sure you're following the law. Key Points: Worldwide Disclosure Facility Opportunity for UK taxpayers to tell HMRC about offshore issues they didn't report before Covers tax years up to and including 2022-2023 It gives you 90 days to tell HMRC everything after you let them know you want to use the facility Works for people living in the UK and those living elsewhere who need to pay UK taxes It could mean that you pay less in fines compared to if HMRC found out on their own What is the Worldwide Disclosure Facility? The Worldwide Disclosure Facility is a way for people and companies to tell HMRC about money or things they own in other countries that they should have paid UK tax on but didn't. This includes money from houses in other countries, money from investments abroad, and gifts or inheritances from people in other countries that you didn't tell HMRC about before. Who can use the Worldwide Disclosure Facility? The WDF is for anyone who wants to disclose a UK tax liability wholly or partly related to an offshore issue. This includes unpaid or omitted tax related to the following: Income arising from a source in a territory outside the UK Assets situated or held in a territory outside the UK Activities carried on wholly or mainly in a territory outside the UK Funds connected to unpaid or omitted UK tax that you have transferred to a territory outside the UK A common misconception that UK resident and non-domiciled taxpayers are unaware of is, that a UK tax liability arises on: Rental income from property located outside the UK If you’re not resident in the UK, you can still make a disclosure if you meet the eligibility criteria. The WDF may not cover 22/23 as you are still within time limits to submit an amended tax return (deadline is 31 January 2025). Why Use the Worldwide Disclosure Facility? Using the WDF can help you avoid bigger fines and possible criminal investigation that could happen if HMRC found out about your overseas money on their own. It's a way to be honest about your taxes from other countries and get back on track with what HMRC requires. It's ok to have investments in other countries, but not telling HMRC about the money you make from them is against the law. The WDF gives you a chance to fix this mistake and show that you want to follow the tax rules. How to Respond to HMRC Nudge Letter HMRC identifies those who need to make a tax disclosure and sends them a nudge letter based on data they have obtained. If you’ve received a nudge letter, HMRC has identified a potential issue in your UK tax affairs. Rather than ignoring this, it's best to seek advice from a tax professional to ensure compliance with your offshore tax affairs. We can assist you in finding irregularities in your offshore affairs before making a disclosure through the WDF. It’s important to seek professional advice and take careful consideration before responding to a nudge letter, as making a false declaration can lead to serious consequences. How Does the Disclosure Process Work? The WDF process has several important steps: Notify HMRC that you want to make a disclosure. This means letting them know you want to use the facility. To register, use the Digital Disclosure Service. You’ll need some key information such as your address, DOB, and National Insurance to notify and disclose. On receiving your unique Disclosure Reference Number (DRN), you must make your disclosure within 90 days after getting the notification acknowledgement. If your disclosure is prompted by a letter from HMRC, you’ll need to state this in the disclosure. Depending on your reasons for not disclosing your tax liability, the penalties will vary. If you’re unsure on the self-assessing behaviour option that applies, seek professional advice. Figure out how much tax, interest, and penalties you owe. You’ll need to disclose any unreported income or gains, as well as the associated tax, interest and penalties. You might need help from a professional for this part. Tell HMRC everything within 90 days of receiving the unique DRN from them. You need to include all the important information about your money and things you own in other countries. Offer to pay the full amount you owe or agree to the HMRC terms to pay it over time, using your Payment Reference Number (PRN). It's really important to be thorough, honest, and clear when you're telling HMRC everything. They can check the information you give them, and if you don't tell the truth or leave things out, you could get in big trouble. The 90-day window to tell them everything is strict, so start gathering all the information you need as soon as you decide to use the WDF. What Penalties Might I Face? If you’re not following offshore tax rules, HMRC takes this very seriously. However, if your disclosure is unprompted, you could reduce the penalties you are liable for. Your penalty amount is based on whether it was a mistake, if it was deliberate or not, and how long you didn’t follow the rules. The Benefits of Disclosing through the WDF Voluntarily sorting out your tax affairs can provide many benefits. HMRC prefers when you come forward rather than having to be tracked down by them. This can prove that you are responsible in your tax affairs. Also, you could potentially reduce the penalties by coming forward, and reduce the number of years assessed. What Should I Look Out For? When using the WDF, there are some important things to remember: Make sure to tell HMRC about everything - if you leave things out, you could get bigger fines and HMRC might investigate you more. Remember to include the interest you owe on unpaid tax when you're figuring out how much to pay. Think about getting help from a professional, especially if your tax situation is complicated or involves many countries. Be ready to show proof of everything to HMRC. This might include bank statements, investment records, and documents about properties you own. Remember that HMRC can look into your finances from up to 20 years ago for serious cases. Know that if you didn't follow the rules on purpose, you could be in really big trouble. Being honest when you use the WDF can help avoid this. If you're not sure about anything when using the WDF, it's a good idea to ask a tax expert for help . They can guide you through the process and make sure you're doing everything right. Conclusion The Worldwide Disclosure Facility is an important tool for people and businesses who need to fix their offshore tax situation. While it might seem scary to tell HMRC about money or gains you didn't report before, using the WDF is usually much better than risking HMRC finding out on their own. It's worth knowing that many countries now share financial information automatically, so it's much more likely that HMRC will find out about offshore money that has yet to be reported. It's important to know that telling HMRC everything can be complicated, especially if you have money in different countries. In these cases, it's a good idea to get help from a tax professional to make sure you're telling HMRC everything they need to know correctly. At Walji, we can offer specialist advice on your tax affairs and help you with your disclosure. To apply for a callback, please fill in our contact form and we’ll be sure to get back to you.

The Let Property Campaign: A Landlord's Guide to Tax Compliance

By Reza Hooda • November 19, 2024
As a landlord, it's important to keep up with your taxes. The Let Property Campaign (LPC) helps those who might have forgotten to report all their rental income. Let's look at what this means for you and how to make sure you're doing everything right. Key Points The Let Property Campaign is a programme for landlords to report missed rental income It often has lower penalties than if HMRC finds out on their own It's for different types of rentals, including UK and overseas properties You have 90 days to figure out and pay taxes after telling HMRC It's better to tell HMRC yourself to avoid bigger problems later What is the Let Property Campaign? The Let Property Campaign is a service by HM Revenue and Customs (HMRC) to encourage residential property landlords to straighten out their taxes. It helps landlords fix their taxes if they haven’t reported all their rental income beforehand. This programme gives landlords a way to come forward, report any unpaid taxes, and follow the tax rules properly. If you haven't disclosed your rental income, you may have received a nudge letter from HMRC. This letter is to notify you to come forward through the Let Property Campaign to disclose your taxes, and ensure you don’t end up with bigger penalties or face criminal investigation. Who is eligible for the Let Property Campaign? The LPC is for many types of landlords, if you are: Renting out one or more properties Renting out holiday homes Renting out rooms in their own home Those who have inherited a property and are renting it out UK residents renting out properties in other countries Non-UK residents renting out UK properties If you're one of these and haven't reported all your rental income, the LPC can help you fix your taxes. It's especially helpful if you didn't know you had to report everything or if you fell behind by accident. The LPC is not for landlords who: Have non-residential properties like shops, garages or lockups, etc. Want to disclose income on behalf of a trust or company How to make the Let Property Campaign Disclosure 1. Tell HMRC First, you need to tell HMRC you want to report your income. You can do this online through the Digital Disclosure Service (DDS) . After you notify HMRC, you have 90 days to make your disclosure. This first step is important because it shows you want to cooperate. 2. Collect Information Use this time to gather all your financial records about your rental income from your property. This includes: Details about you and when you bought the property Details about the property The total rental income for each year (not declared to HMRC) You don’t need to include income which you’ve told HMRC about (previously declared in a tax return) Work out allowable expenses incurred on income (day-to-day money spent) Deduct allowable expenses from income to determine taxable profit Being thorough here will help make sure your report is correct and complete, which can prevent problems later. Read our blog post to learn more about expenses landlords can claim . 3. Calculate Taxes Once you’ve worked out the additional rental income you need to figure out how much tax you owe. The rates of income tax that you’ll pay depend on how much you earn above the Personal Allowance. 4. Submit and Pay Once you've calculated the amount of tax you owe, you need to make a formal offer for the full amount to HMRC. Essentially you need to complete the disclosure and provide details of the rental income not declared to HMRC. Once your offer is met with an acceptance letter, it will create a legally binding contract between you and HMRC. You'll need to pay the taxes you owe, plus any interest and penalties before the 90-day deadline on your notification acknowledgement letter. If you can't pay it all at once, you need to speak to HMRC before submitting your disclosure or payment. How many years are included for the disclosure in the LPC? It depends. HMRC will ask the reason why you didn’t declare, whether it was deliberate or not. Depending on how many years you have not reported income from your property, this can range from four to 20 years. Understanding Let Property Campaign Penalties While the LPC has better terms than if HMRC investigates you, there are still penalties. The exact penalty will depend on things like: How long you didn't report the income Why you didn't report it How helpful you are during the process Whether you didn't report on purpose or by mistake Penalties can be from 0% for honest mistakes to up to 100% of the tax owed for hiding income on purpose. But by coming forward through the LPC, you'll likely face lower penalties. How HMRC finds unreported Income HMRC has smart ways to find unreported rental income. Their system, called "Connect", gets information from many places, including land registry records, letting agencies, local councils, bank and credit card transactions etc. This makes it more likely that unreported income will be found, showing why it's important to report yourself. HMRC keeps getting better at this, making it harder for landlords who don't report to stay hidden. Staying on top of taxes in the future After joining the Let Property Campaign, it's important to keep following tax rules. This includes: Keeping good records of all rental income and expenses Sending in Self Assessment tax returns on time Staying informed about changes in tax laws for landlords Regularly checking your tax situation to make sure you're still following the rules Thinking about using property management software to help keep records Download a free book (from our Partner Reza Hooda) to answer all your property tax questions. Conclusion The Let Property Campaign gives landlords a chance to fix their taxes and avoid big problems. By choosing to report unreported rental income yourself, you can get lower penalties and peace of mind. Since tax laws can be tricky, especially for property owners, it's often a good idea to get professional advice. This helps make sure you're following current rules and are ready for future changes in property taxes. At Walji, we can offer specialist advice on your property situation. To apply for a callback, please fill in our contact form and we’ll be sure to get back to you.
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