Can my company pay my children’s school fees?

6th May 2022

The short answer is yes you can but, but the school fees are not deductible for corporation tax and paying them from your company can result in personal tax being charged.

However, there are a few options to pay less tax and pay less in private school fees from your own pocket.

Grandparents  – set up a Family company

One option is to ask the Grandparents to set up a family company.  If your family has property or investments that generate income, then you can use these to create income in the family company that is then passed on to the grandchildren through a dividend.  You would need to name the children as shareholders and then the school fees are then paid by distributing dividends to the children. This could be tax free for the children as they can use their personal tax allowance, assuming they have no other income

The key here is that the grandparents must create the business and not the parents.  Parents cannot gift to children without incurring a tax charge.

This is a great way of paying for private school fees where the grandparents would prefer to help the grandchild during their lifetime rather than leaving their wealth as an inheritance.

Grandparents – Set up a family Trust

Another option is that grandparents could consider a Discretionary Trust for grandchildren. They would need to be prepared to give away part of their estate though.

An individual can give away up to £325,000 without incurring Inheritance Tax. This reduces their own estate by £325,000 thereby potentially saving 40% tax on this amount (£130,000). As a couple that amounts to £650,000, which is a serious contribution when it comes to the school fees.

The catch though, is that it takes seven years for a gift to fall outside their estate for Inheritance Tax purposes but provided they survive seven years then the gift no longer makes up part of the donor’s estate.

Income payments from the trust are paid net of income tax to grandchildren who can generally reclaim the tax paid by the trustees via their own personal allowances.  There may also be savings or advantages when it comes to potential Capital Gains Tax (CGT) which, if it is payable on putting assets into trust, can typically be ‘held-over’ so that there is no tax charge until the assets are sold later.

With any tax planning of this nature, it is best to get specialist advice as each individuals circumstances vary.  If you’d like to talk to us further, call Denise on 0333 200 0714.

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