I pay both my grandsons’ school fees, which amount to £20,000 a year. The fees are paid out of my income. How do I ensure that this is not taxed as a gift when I die? How do I keep records for HMRC to show these amounts are paid within my income?
You claim that the fees are paid out of your normal income. If that can be proven, the ‘normal expenditure out of income exemption’ should mean that the money you pay out on a regular basis for your grandsons’ school fees should not be taken into account for inheritance tax (IHT) calculations on your death.
The exemption applies on three conditions:
- The fees formed part of your normal expenditure.
- It was all met out of your income (taking one year with another).
- It left you with enough income to maintain your normal standard of living.
The ‘gifts out of normal income’ exemption will not be allowable if, as a result of paying your grandsons’ school fees, you then had to dip into savings in order to meet your normal living expenses.
To help prove that you meet the criteria, note down your normal living expenses in comparison to your net income and make sure that you keep that paperwork safe with your will.
Your paperwork should prove that your normal living costs are in no way hampered by the outgoings that you are incurring to pay the school fees.
I would also suggest paying a regular amount each month into a dedicated account that has been set up to pay the school fees. This is a much better idea than just transferring large sums of money when they are due each term, providing an audit trail that is much easier to trace.