School Fee Schemes

Settlements Legislation: School fee Schemes

Over the years, we have seen many "tax efficient" schemes come and go concerning the payment of school fees. This has been closely followed by tightening regulations after some high-profile court disputes.

The tax law known as settlements legislation is an area which attracts significant interest from HMRC, advisers and wealthy individuals. We have seen many schemes come and go, actions taken and legislation introduced to tighten settlements legislation and regulations. As there are potentially significant cost savings, this continues to be a hot topic.

We will now look at settlements legislation, school fees and the validity of some of the advice available today.

What is settlements legislation?

As is the case with many elements of tax law, the original settlements legislation can be traced back decades, to the 1920s to be exact. It was, however, updated in 1988 and more recently in 2005, when written into its current form known as Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005. There is a straightforward premise to settlements legislation:-

“If the transfer of shares/assets is substantially a right to income, the income will still be deemed part of the settlor’s income in relation to income tax. Basically, the settlor has retained an interest in the shares/assets.”

The legislation has been widened to include spouses, civil partners, children and third parties, where a member of the settlor’s family benefits directly or indirectly. This is a direct means of trying to head off an array of school fee schemes which have attempted to sidestep legislation, reducing income tax to pay for further education.

Official settlements legislation

Such have been the problems concerning settlements legislation, that specific regulations have been created to address the issue.

629. Income paid to children of settlor

1Income which arises under a settlement is treated for income tax purposes as the income of the settlor and of the settlor alone for a tax year if, in that year and during the life of the settlor, it:
ais paid to, or for the benefit of, a child of the settlor, or
bwould otherwise be treated as income of a child of the settlor

In recent months, several schemes have been marketed as tax-efficient when it comes to paying school fees. A number of these schemes are under review by HMRC, and it will be interesting to see how this plays out.

As a means of demonstrating the potentially significant impact of settlements legislation abuse, it is probably easier to give an example.

Example of settlements legislation in action

Visualising the subject of settlements legislation in a practical example is probably easier. If we look at a successful businessman sending their two children to private school, this is where it gets interesting.

Theoretical scenario

Businessman: Additional rate taxpayer

School fees: £70,000 per annum (combined fee for two children)

Typical payment plan

Gross dividend: £120,000
Tax rate: 39.35%
Tax paid: £47,220

Net dividend income: £72,780

If the businessman transferred shares to his children via a trust (assuming they were too young to hold shares in their own right), there could be significant tax savings. In effect, the share transfer is just a “right of income”, with their father retaining ownership.

Revised payment plan (assuming children have no other income)

If we look at the situation for each child, this will identify the significant savings, in theory, but outlawed under HMR legislation:-

Gross dividend payment: £38,000
Personal income tax allowance: £12,570
Dividend tax allowance: £1000
Taxable income: £24,430
Tax rate: 8.875%
Tax paid: £2137

Net dividend: £35,863

As there are two children, we can double the gross dividend as follows:-

Gross dividend payment: £76,000

Net dividend payment: £71,726

If this plan were allowed, the tax paid would be £4274 instead of £47,220, a significant saving!

Legal ways to fund school fees

While it is essential to be aware of the settlements legislation, we must also recognise that there are tax-efficient means of funding school fees. Some of the more common scenarios include:-

  • Gifting of shares from grandparents or aunt/uncle to a child. Many will be surprised to learn this is permitted under the rules, with the child paying a lower dividend tax rate.
  • A bare trust is set up for the benefit of the children of grandparents or aunt/uncle into which the shares are transferred, with the children effectively owning them. Similarly to the above scenario, this is permissible.
  • Grandparents or aunts/uncles issue shares in their own company to the children via a trust – for their education. They receive dividends on which they pay a lower tax rate, again allowed under the rules.

When considering settlements legislation, it is important not to assume the same restrictions or entitlement for different parties when gifting shares/income-earning assets to children. You might be surprised!

Unlawful ways to fund school fees

HMRC have been keen to identify permissible scenarios where shares can be transferred to children to fund their education and those deemed unlawful. Here are some examples of illegal ways in which people have tried to fund school fees:-

  • Parents gift shares to their children, taking advantage of a low dividend tax rate.
  • Parents gift shares to grandparents or aunt/uncle, which are then transferred to the children. This is seen as an indirect settlement.
  • Parents have their own company and issue shares to grandparents or aunt/uncle (or anybody else), which are then placed in trust for the children.

Using the trust system, the tax benefits may not always be evident to HMRC and for what purpose they have been used. Non-disclosure of such trusts, which are covered by the legislation, is illegal and can lead to criminal charges.


As demonstrated above, transferring shares to a child to cover school fees can create dramatic tax savings. In practice, HMRC has been very precise in how they restricted such activity after falling foul of high-profile cases in years gone by. Recently, several controversial schemes have been marketed as a tax-efficient means of covering school fees. Unfortunately, such is the way that HMRC has tackled the issue that many eventually fall foul of the regulations.

If you are approached with a scheme that seems too good to be true, it is essential to do your research and speak with your accountant. Our team have a broad knowledge of tax legislation, both the spirit and the practical elements of the law, and can advise you accordingly. There are ways in which school fees can be incorporated into broader long-term tax planning. If you would like to discuss the options in more detail, please feel free to call us.


Chris Wilkins FCCA is a Chartered Certified Accountant, Registered Auditor and the managing partner of Wilkins Southworth based in Barnes, South West London

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