IN A RECENT tax spotlight report, HM Revenue and Customs (HMRC) has highlighted a supposed school fees tax planning scheme that has gained popularity among owner managed companies. HMRC suggests in this report that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work as the arrangements are caught by specific anti-avoidance legislation (https://www.gov.uk/guidance/dividend-diversion-scheme-used-to-fund-education-fees-spotlight-62).

In today’s Shipleys Tax brief, we look at school fees tax planning in light of HMRC report above and ask: is there still room for sensible school fees planning?

HMRC suggests that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work…

In a nutshell

In the report HMRC explain the arrangement involves a company issuing a new class of shares, which are then bought by a relative of the company owner for a sum considerably below market value. These shares are gifted to a trust for the company owner’s children. The trust then receives substantial dividend payments, which are taxed at a much lower rate due to the children’s personal tax-free allowance, dividend allowances, and basic tax rate eligibility.

However, HMRC state that this scheme is ineffective as it contravenes specific anti-avoidance legislation covering similar arrangements aiming to provide certain tax advantages. HMRC has strongly advised anyone involved in such schemes to withdraw from them and settle their tax affairs.

Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties. This scenario underlines the complexity and risks inherent in engaging with such tax avoidance strategies.

So, school fees planning is dead?

Not quite.

Legitimate tax planning, which encompasses school fee planning, is still very much a viable and acceptable practice. This holds true as long as the planning is carried out in a non-artificial or non-abusive manner. Like all forms of tax planning, school fee planning should be grounded in genuine financial activity.

Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties.

It is essential to understand that while attempting to optimise tax liabilities is acceptable, artificial or abusive arrangements is where the problem begins. As long as there is a genuine financial activity underpinning these plans, and not just contrived setups designed solely for tax avoidance, they are likely to be accepted by HMRC.

Next Steps

If you are involved in any school fee tax scheme you should take immediate professional advice which may include:

• cease, desist and withdraw from making any further distributions to fund school fees

• settling tax affairs which make include making unprompted disclosures to HMRC as this should mitigate the penalty position

• unwinding any structures/trusts, however, one will need to be alive to the tax consequences of doing so

• updating the trust register with HMRC, if applicable.

Future of School Fees Planning

Could there be situations where affluent families, non-parent family members, or relatives can genuinely transfer income-producing assets without falling foul of the anti-avoidance rules?

In short, yes – but with conditions.

In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes whilst steering away from the contrived and artificial arrangements which may be caught.

Also, one should note that the gifting of assets can lead to tax liabilities, exposing the donor to capital gains tax and inheritance tax. As such, it is prudent to seek professional tax advice before entering any planning.

In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes…

Final Words

When done ethically and transparently, sensible school fee tax planning can be effective for those aiming to support a child’s education. However, it is imperative to steer clear of artificial arrangements which carry considerable financial repercussions.

Always consult with a reputable tax adviser before making any decisions about school fees tax planning.

At Shipleys Tax, our tax planning strategies are always designed to be sensible, practical and transparent, giving you peace of mind that your tax affairs are fully compliant with all relevant legislation.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.