I’m sure this question has come up before, but I’m looking at the situation where grandparents pay the grandchildren’s school fees. There is an argument that the payment is a CLT rather than a PET because it doesn’t increase the estate of the donee. However, where the payment is made out of income, does the gifts out of income rule take priority over the CLT?
If the grandparent contracts directly with the school, is the liability for the fees theirs, thereby eliminating any possibility of a gift?
Finally, does anyone have experience of HMRC taking the point that payment of school fees is a CLT?
I have not ever seen such payments categorised as CLTs. Indeed, I am not aware of HMRC ever considering them to be CLTs. I have always considered them PETs when made from capital. As to whether the gifts from excess income rules take priority over CLTs, if, as a matter of fact, the school fees are paid from genuine excess income then you are not within the scope of IHT (CLT or PET).
Mishcon de Reya LLP
If parents of the child have contracted with the school to pay the child’s school fees and grandfather then in fact pays the fees directly to the school this would seem to satisfy s3A(2)(b) and thus is a PET.
If grandfather pays monies to parents then clearly a PET.
If grandparents contract directly with school to pay grandson’s school fees why is this not a CLT? It would not satisfy either of s3A(2)(a) or (b)?
Tolley’s IHT has an example in the Introduction chapter (possibly para 1.4) about how a chargeable transfer can arise in relation to a grandparent paying school fees. The example is a little unusual, as it assumes that the grandparent will pay a lump sum for the grandchild’s school fees for his/her entire time at the school (ie all years at the school) and that no refund is to be paid back to the grandparent. Schools sometimes like to receive an upfront payment of this sort and will give some sort of discount.
However, if the grandparent is paying the school fees a term/year at a time and out of surplus income, then NEOI exemption may be available, as Stuart says. It seems that if the grandparent pays the fees on an ad hoc basis or does not have sufficient surplus income, then, provided that it is just a term at a time, it seems likely that it will be a PET. Alternatively, the grandparent could pay the money to the grandchild’s parents (which would be a PET, assuming they avoid Quistclose trust type arrangements), who then pay the school (or who may have already paid the school by the time they receive the money from the grandparent).
i have always considered it is a CLT, but NEI applies if applicable
If I purchase a car and give it to you, is that not a PET? If so, why should the IHT situation change when what I buy you is time in a rental car instead?
That, I would suggest, is the interpretation. The grandfather buys himself a service (which has a value as evidenced by the open market cost of the service). He then gifts that service to the grandchild, creating a PET. Consider, for example, that he could have sold that place at the school to a third party (subject to the agreement he entered into with the school, obviously), potentially at a profit. Scalpers do this all the time with concert tickets.
Elliot, Bond & Banbury
Maybe hmrc would accept this, but it is always better for the parents to contract to avoid doubt. Who wants to end up in court for no reason!
The reason for the difference is that s3A(2)(a) is satisfied where the car is gifted but neither s3A(2)(a) nor (b) is satisfied re the rental gift.
In this case there is no element of bounty; the transactions are based on market values.
I think perhaps my line of thought was unclear.
The grandfather purchases the service (the right to attend the school, the concert ticket, etc), which has value. We know this because he purchased it on the open market. He transfers the right to the service to the grandchild. The grandchild, in theory, could sell on the right to attend the school, the concert ticket, etc. Until the service is consumed (he attends the school/concert), the estate of the grandchild is indeed increased by the value of the transferrable right that he has received. Hence a PET.
The fact that the grandchild does, in fact, subsequently consume the service should not alter the IHT position of the original gift.
What is perhaps more relevant is that in the couple of cases where I have dealt with the estates of grandparents who died within seven years of paying school fees for grandchildren, HMRC has always accepted them as PETs. Granted, in none of those cases would the distinction have altered the IHT position of the estate.
Elliot, Bond & Banbury
The problem of interpretation arises because ‘disposition’ and ‘gift’ are not defined expressions in IHTA even though they are central to the concepts underpinning IHT.
I don’t see why paying school fees cannot be a ‘gift’ that falls within s 3A(1A). By paying the fees I have relieved someone else from having to pay them (probably the parent). That is presumably the approach that HMRC take.
This is a topic that comes up for discussion regularly on this discussion board. I remember a thread some time ago when the IHT consequences arising out of a dinner party (at which the host invites his guests to consume several bottles of expensive champagne provided by the host) were examined in forensic detail. The IHT consequences appeared to depend, in part, on whether or not it was the host that opened the bottle!
Paul I think you are exactly right here. You are not actually gifting anything to the grandchildren (they are not obligated to pay their own fees). As long as the parents are contractually obligated to pay those fees, you are settling their debts for them which is a clear PET to them. It doesn’t change the nature of the transfer simply because you decide to pay the creditor directly.
Allan Janes LLP