School fee trust fund

How to Use a Trust Fund to Cover School Fees and Reduce Tax Bills

Understanding Trust Funds: A Simple Guide

A trust fund helps you transfer money or assets to someone you trust, known as a trustee, who then manages these assets for someone else, called the beneficiary. You control how the money is used by setting clear rules in a legal document, known as the trust deed. This allows you to support your family while saving tax and maintaining control.

Turning a Trust into an Education Fund

An educational trust fund is created to cover specific costs such as school fees, tuition, books, and accommodation. Rather than handing money directly to your children or grandchildren, you allow trustees to pay schools or universities on their behalf. This structure offers a clear way to support their education while ensuring the money is used responsibly.

With VAT applying to private school fees from January 2025, setting up a trust could help families plan ahead and reduce the long-term cost of education.

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Why Choose a Trust for School Fees?

Families use educational trusts for many strong reasons:

• Lower Income Tax: When planned correctly, the trust’s income is taxed using the child’s personal allowances, which means less tax and more money available for fees.

• Reduce Inheritance Tax (IHT): If you live seven years after placing funds into the trust, those assets may fall outside your estate. This can reduce IHT significantly.

• Stay in Control: You set the rules. Trustees follow your instructions to make sure the funds are used only for education.

• Avoid the Upcoming VAT: If you pre-pay fees before January 2025, you may avoid the 20% VAT charge.

• Grow the Funds Over Time: Trustees can invest the money in tax-efficient ways, helping the trust grow and cover years of school costs.

✅ Need help setting up a school fee trust for your grandchildren?
We’ll walk you through the process from start to finish—choosing the right trust, preparing legal paperwork, registering with HMRC, and ensuring tax compliance every year.

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What to Consider Before Setting Up a Trust

Before starting, think about the following:

• Initial and Ongoing Costs: You’ll likely need legal advice to set up the trust and annual support to handle tax returns and compliance.

• No Access Once Gifted: Once you move the money into the trust, it must be used according to the trust deed. You cannot take it back.

• Trust Taxes Can Be Complex: If the trust holds more than the nil-rate band, it may face extra tax every 10 years (up to 6%).

• Smaller Gifts May Not Justify It: If you’re planning to gift less than £100,000, it might not be cost-effective.

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How to Set Up a School Fee Trust Fund

Setting up a trust takes careful planning. Here’s how the process usually works:

1. Choose the Right Trust Type: Bare trusts are simpler but offer less flexibility. Discretionary trusts offer more control but face more rules.

2. Create a Legal Trust Deed: A solicitor drafts a document that defines who benefits, what the trust pays for, and who controls it.

3. Appoint Trustees: Select reliable people to manage the money. They should understand your goals and be willing to follow them.

4. Fund the Trust: Transfer cash, investments, or property into the trust.

5. Register the Trust: You must register the trust on HMRC’s Trust Registration Service (TRS) within 90 days.

6. Maintain Good Records: Trustees must track decisions, file tax returns, and manage paperwork each year.

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What Documents Must Trustees Keep for HMRC?

To stay compliant, trustees must maintain detailed records. These include:

• The trust deed and any updates

• Annual accounts showing income and spending

• Records of payments made to schools or beneficiaries

• Investment valuations and statements

• Trustee meeting notes and decisions

• Tax return forms (SA900)

• Copies of letters sent to and from HMRC

• R40 forms if reclaiming tax for children

All records should be kept for at least six years. Good record-keeping helps avoid penalties and keeps the trust in good standing.

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Who Can Create an Educational Trust?

Any adult in the UK can set up a trust. Grandparents are often in the best position to do so, as the income paid to grandchildren can be taxed using the child’s own tax allowances. On the other hand, if a parent sets up the trust and the child is under 18, HMRC will treat the income as the parent’s, which removes the tax advantage.

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A Real Example: Mr & Mrs Khan

Mr and Mrs Khan wanted to help with their three grandchildren’s private school fees. They moved £300,000 into a discretionary trust. The trustees invested the money and arranged for termly payments to be sent directly to the schools.

How It Works in Practice

The trustees opened a bank account in the trust’s name and invested in a mix of income-generating assets such as dividend stocks and insurance bonds. Each term, they paid the school directly from the trust’s income.

Because grandparents set up the trust—not the children’s parents—the income is treated as the child’s, not the settlor’s. This means:

• Each child uses their £12,570 personal allowance

• They also benefit from the £500 dividend allowance

• If they have no other income, the £5,000 savings allowance may also apply

As a result, the trust income paid to them is taxed at 0%. This reduces overall tax and increases how much money remains available to cover fees.

The Khans ensured that everything was documented, and they received annual reports from the trustees. After seven years, the gift left their estate for inheritance tax purposes, saving tens of thousands in tax.

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How Do Children’s Tax Allowances Help?

Children are entitled to the same basic allowances as adults. If structured properly, trust income passed to them can be tax-free. Here’s a simplified breakdown:

• Personal Allowance: £12,570

• Dividend Allowance: £500

• Savings Starter Rate: Up to £5,000 (if no other income)

So, if the trust earns £10,000 and splits it between two children, each child may receive £5,000 completely tax-free. This allows more of the trust’s money to go toward education rather than to HMRC.

🔎 Tip: If a parent sets up the trust and the children are under 18, this benefit is lost. Income is taxed on the parent instead. That’s why grandparents are the best people to create education trusts.

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Common Questions on School Fee Trusts

Can My Company Pay School Fees?

Not efficiently. If your company pays school fees for an employee or director’s child, it becomes a benefit-in-kind, triggering tax and National Insurance. It’s usually better to pay yourself and use those funds in a family trust.

Are There Restrictions on What I Can Put in a Trust?

Yes. Some assets, such as pensions, certain life insurance policies, and personal-use property, cannot be placed in a trust. Property can be included, but it may trigger stamp duty and capital gains tax, especially if it’s your home.

What Is a Bare Trust?

A bare trust gives the child absolute ownership of the assets. Trustees hold the money until the child turns 18 (or 16 in Scotland). After that, the child can demand access to the funds. It’s simple and transparent but offers no control once the child reaches adulthood.

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Extra Tips for Managing Your Trust Effectively

• Work With Professionals: Get advice from a tax adviser or solicitor familiar with trust planning.

• Use the Right Allowances: Plan distributions to match personal allowances.

• Hold Regular Trustee Meetings: Record every key decision and payment.

• Exit on Time: When the school years end, wind up the trust or repurpose it.

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Final Thoughts

A school fee trust is more than just a tax-saving tool—it’s a smart way to support your grandchildren’s future. With careful planning, you can reduce income and inheritance tax, avoid the upcoming VAT hike, and stay in control of how the money is used. If you’re thinking ahead and want to protect family wealth, now is the time to take action.

📞 Written by etaxfiling.co.uk
Contact us for expert advice on school fee trusts, HMRC compliance, inheritance tax planning, and family wealth structuring.