School fees paid by a grandparent are gifts for Inheritance Tax, but they can be fully exempt if they are paid out of surplus income as part of a regular pattern and leave the grandparent able to keep up their usual standard of living. Fees paid from savings, or as a lump sum in advance, are usually potentially exempt transfers instead, and drop out of account only if the grandparent survives seven years.

Are school fees paid by a grandparent a gift at all?

Yes. Inheritance Tax looks at whether a payment reduces the value of the giver’s estate, and HMRC’s guidance says a gift can be money or anything else of value that reduces the estate. Paying the school directly rather than handing cash to the parents does not change that: the grandparent is poorer and the family is richer.

Parents are in a different position. Section 11 of the Inheritance Tax Act 1984 says a payment by one party to a marriage or civil partnership for the maintenance, education or training of a child of either party is not a transfer of value at all, for a period ending not later than the year in which the child turns 18 or, after that, stops full time education or training. A grandparent is not a party to that marriage, so this rule does not normally help them.

There is one exception worth knowing. Section 11(2) covers payments for the education of a child who is not in the care of a parent. Once the child is over 18 it applies only if the child was in the care of the person paying for substantial periods before that age. A grandparent who is bringing up a grandchild because the parents cannot may therefore fall within it. HMRC’s Inheritance Tax Manual at IHTM04176 adds that where this condition fails and the child is in the care of a parent, the payment is regarded as a gift to the parents.

When are the fees exempt as normal expenditure out of income?

Most grandparents rely on section 21 of the 1984 Act, the exemption for normal expenditure out of income. A gift is exempt to the extent it is shown that it was part of the giver’s normal expenditure, that taking one year with another it was made out of income, and that after all such gifts the giver was left with enough income to maintain their usual standard of living. There is no cash limit, which is why it suits a bill that can run to five figures a year.

HMRC’s manual names school fees directly. IHTM14243 says gifts may relate to specific costs such as grandchildren’s school fees, which may vary in amount, so year to year changes in the bill do not by themselves break the pattern. On the pattern itself, IHTM14242 says a reasonable span to show regular giving is normally three to four years, and that a single gift can qualify if there is strong evidence it was meant to be the first of a series with a realistic expectation of more. A written commitment to the parents or the school, signed when the first term is paid, is the kind of evidence that helps.

What counts as income for this test?

IHTM14250 says income follows normal accounting rules rather than the income tax definitions, and is measured after income tax. Pensions, salary, rents, interest and dividends all count. Some regular receipts do not: withdrawals from a single premium insurance bond, such as the common 5% a year, are usually capital in character, and the capital element of a purchased life annuity is excluded by section 21(3).

Timing also counts. HMRC starts by checking whether the income of the year in which the fees were paid covered them. Unspent income does not stay income for ever: without evidence to the contrary, HMRC treats it as becoming capital after two years. Paying this year’s fees from income saved five years ago is therefore likely to be challenged.

The standard of living condition is tested separately. IHTM14255 says that if the grandparent had to dip into capital to meet normal living costs, the exemption is not available in full, although part of the gifts may still qualify. Part of a single payment can be exempt under section 21 and the rest dealt with under another exemption or as a potentially exempt transfer.

What if the fees are paid from savings or as a lump sum?

A payment that fails the income test is a gift to another individual and so a potentially exempt transfer. GOV.UK explains that no tax is due on it if the giver lives for seven years afterwards. Each termly payment is a separate gift with its own seven year clock.

The annual exemption covers the first £3,000 of gifts in each tax year, and any unused part can be carried forward for one tax year only. Beyond that, if the grandparent dies within seven years, the gifts are added up in date order and use the £325,000 threshold before the rest of the estate does. Tax on gifts made three to seven years before death is reduced by taper relief, but only if the total of gifts in the seven years before death is over the threshold. See the seven year rule for how the running total works.

A lump sum paid now to cover several years of future fees is usually made from capital, and IHTM14231 says transfers of capital assets fall outside section 21 unless, exceptionally, they were bought out of income for the purpose of the gift. Paying in advance does not stop the money leaving the estate, but it does move the payment out of the income exemption and onto the seven year clock.

Does it matter who receives the payment?

For the income exemption it makes little difference. IHTM14243 says gifts from income are usually transfers of money made either directly to the recipient or as payments on their behalf. Gifts to people in the same category, such as several grandchildren, can usually be considered together when looking for a pattern, even if the individual children change.

What changes the picture is the reason for the payment. A one off payment for a different purpose, such as a large sum towards a grandchild’s flat, is not comparable with termly fees and will be tested on its own. For how VAT now affects the fees themselves, see VAT on education and private school fees.

How might this work in practice?

Illustration only. Margaret has net pension and rental income of £60,000 a year after tax, and her usual living costs are £30,000. In September she writes to her son confirming she will pay her grandson’s fees of £18,000 a year until he leaves school, and pays each term from her current account. Each year her income covers both the fees and her living costs, so the payments are exempt under section 21 and do not use any of her £325,000 threshold.

Three years later she also pays £40,000 from her savings to cover two years of her granddaughter’s fees in advance. That payment comes from capital and is not part of the pattern. Her annual exemption covers £3,000 of it, or £6,000 if the previous year’s exemption was unused, and the balance is a potentially exempt transfer. If she dies within seven years, it counts towards her threshold; if she survives seven years, it falls away.

What records will the executors need?

The exemption is claimed after death, not when the fees are paid. Executors report lifetime gifts on form IHT403 alongside the main IHT400 account, and HMRC will want to see that each of the three conditions was met. Useful evidence includes a yearly summary of income after tax and normal spending, the letter committing to pay the fees, the school’s invoices and the bank statements showing payment. GOV.UK asks people who make gifts to keep a record of what they gave, to whom, and its value at the time. Our guide to completing the IHT400 covers the wider return.

What mistakes come up most often?

  • Assuming the family maintenance rule in section 11 covers grandparents. It covers parents, and grandparents only where the child is not in a parent’s care.
  • Paying fees from savings and later claiming the income exemption. If income for the year did not cover the fees and living costs, at least part of the payment is a potentially exempt transfer.
  • Starting payments very late in life with nothing in writing. HMRC expects strong evidence that a first payment was intended to be one of a series.
  • Counting bond withdrawals or long accumulated savings as income.
  • Keeping no records, so executors cannot show the pattern or the surplus years after the payments were made.

Grandparents who want to give a single larger sum rather than pay as they go should compare the position with a one off capital gift, which relies on the seven year rule rather than the income exemption.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.