Rising costs of private education have left private business owners reflecting – can school fees be paid more tax-efficiently via the business?
Fundamentally, if the business pays the school fees of an owner’s child directly, the fees are treated as employment income in the hands of the owner. So, no benefit. The ‘all-too-easy’ trick of passing shares to the children (or a Trust for their benefit where under 18 years of age), for them to receive the dividend income at lower tax rates, is equally protected against by anti-avoidance rules known as the ‘Settlements Legislation’. This effectively treats the income as that of the parent – so again, no benefit.
Recent media attention has focused on dividend diversion schemes – contrived arrangements to circumvent the anti-avoidance rules. Under such a scheme, a relative of the business owner (such as a grandparent or sibling) would purchase new shares in the company at a price significantly below market value. The relative would then gift the shares to a trust for the benefit of the business owner’s children. The company would then declare dividends on the new shares, which are paid to the trust. The dividend income (supposedly assessed to tax at the children’s lower marginal tax rates) is then used to pay the school fees. The parents may, coincidentally of course, decide to reduce their incomes by a similar amount!
Unsurprisingly, HMRC have issued strong statements, warning against such contrived arrangements such as this, touted by the less scrupulous. Any intended tax savings, together with penalties and interest, are probably the best-case scenario once investigated.
Genuine, non-parental arrangements, where (for example) grandparents own the business and wish to fund the school fees for their grandchildren remain perfectly legitimate and share ownership can be restructured beneficially. As can further education fees for children over 18, when funded by parents. As always, sensible tax planning is about fully understanding the rules in the context of your circumstances, not manipulating your circumstances to fit the rules!
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