As the end of the academic year approaches, parents will be looking ahead to the new academic year and with it school fees. The question of whether a trust can be established to pay those fees is often asked.
The 2025-26 academic year will be the first academic year to feel the full impact of the Labour government’s addition of VAT on school fees. It will see parents having to find on average £20,000 a year for day pupils and up to £60,000 or more for those that board. It is not surprising, therefore, that grandparents increasingly help.
A trust is often a suitable and tax-efficient way for grandparents to fund those fees.
At its most basic, a trust is simply a legal arrangement created by an individual, called the settlor, where assets or cash are placed under the control of a trustee for the benefit of an individual, the beneficiary, or a specific purpose.
There are typically two types of trusts used to help meet school fees: a bare trust and a discretionary trust.
Bare trusts are a simple trust structure where the cash or assets are held in the names of Trustees. Trustees, which could be grandparents or the children’s parents, manage the assets using them to pay school fees.
Their simplicity is reflected in the tax treatment. Income made by the trust is taxed at the grandchildren’s personal rates, with the transfer of assets into the trust falling outside of inheritance tax (should the settlor survive seven years after its creation).
A bare trust does have one major drawback. As the beneficiaries are treated as the legal owners of the funds from the outset, once a trust has been created the named beneficiaries cannot be changed, and those beneficiaries gain full control of any assets in that trust once they turn 18. They will then be free to spend the trust funds however they wish.
Where grandparents wish to help just one or two grandchildren a bare trust may well be sufficient.
Discretionary trusts are another option. A discretionary trust, like a bare trust, gives trustees control over how funds are used. But unlikely a bare trust, they offer greater flexibility and control.
Assets are better protected with grandchildren not necessarily able to access funds at 18. This means funds can be used to help grandchildren whilst at university, or indeed to help future and as yet unborn grandchildren.
They do, however, have a significant disadvantage. They are more complex to set up and manage, requiring ongoing administration (and costs). Transfers into discretionary trusts above the nil-rate allowance (currently £325,000) will be liable to an immediate 20% inheritance tax charge and may well trigger a 6% charge every 10 years or when capital assets leave the trust.
Trusts are undeniably a good way for grandparents to help with their grandchildren’s school fees, but there is a simple alternative, and that is to simply gift funds to your children to allow them to pay school fees directly.
Gifting is straightforward and if you survive seven years after making that gift there will be no IHT implications. Gifting can however create complex IHT tails if staggered over a longer period of time.
It is important that grandparents take expert advice before setting up a trust to help pay school fees to ensure the right and most tax-efficient route is taken.
Contact our Private Client Solicitors
If you are in need of advice or assistance on any of the legal issues mentioned in this article, please contact Olivia Meekin, Partner, or any member of our experienced Private Client team on 020 7631 4141 or email privateclient@bishopandsewell.co.uk
The above is accurate as at 22 April 2025. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
