In a recent query to a financial planning consultant, JB sought clarification on whether paying his grandchildren’s university tuition fees would qualify as regular payments out of income or as contributions to charitable institutions. The goal was to potentially avoid inheritance tax (IHT) on these payments without having to wait seven years.

Ian Futcher, a chartered financial planning consultant at Quilter, explained that helping to pay a grandchild’s university fees can not only ease their financial burden but also reduce the size of the estate and potentially future IHT liability. However, there are specific rules that need to be followed to ensure compliance with tax regulations.

Currently, IHT is due on estates worth over £325,000, with exceptions for direct descendants and married couples or civil partners. With recent changes to IHT, individuals are seeking tax-efficient ways to pass on assets, as pensions will no longer be outside the estate from April 2027. This leaves limited strategies for reducing IHT, with lifetime gifting being a viable option.

While payments to universities do not qualify as charitable donations for IHT purposes, they may be considered as personal gifts. To potentially avoid IHT, individuals can make gifts out of regular income, subject to specific conditions. The payment must come from regular income, be part of a pattern of giving, and not impact the standard of living.

Record-keeping is crucial to demonstrate that the gifts meet the criteria for gifts out of income. Keeping track of the source of the gift and ensuring that income exceeds spending is essential. Making regular payments directly to the grandchild instead of the university can establish a consistent pattern of gifting.

If the criteria for gifts out of income are not met, individuals can utilize their annual exemption of up to £3,000 per tax year. Couples could potentially gift up to £12,000 in one year if they did not use the allowance the previous year. However, exceeding this limit could trigger the seven-year rule for potentially exempt transfers.

Having a clear plan in place and seeking professional advice is essential to avoid unexpected tax bills and ensure that generosity does not lead to unforeseen consequences. Individuals should consider the implications of supporting family members financially and plan accordingly to minimize tax liabilities.