Trusts for Grandchildren: Helping with School Fees Whilst Reducing Inheritance Tax

Funding school fees can be an effective way of passing wealth to the next generation whilst seeing the benefit of that support during your lifetime. 

For some families, regular fee payments form part of a longer-term strategy of reducing the value of their estate, whilst ensuring that younger generations receive the benefit of that wealth when it is likely to have the greatest impact.  

Many grandparents, however, are looking beyond simply paying school fees. They are considering how education funding can fit within a broader plan for family wealth, succession and inheritance tax mitigation. Rather than gifting money to grandchildren outright, trusts can allow assets to be retained within a controlled structure whilst still providing meaningful financial support to future generations. 

Can Paying School Fees Help Reduce Inheritance Tax?  

Many grandparents are surprised to learn that contributing towards school fees can sometimes assist with inheritance tax planning.  

Where payments are made from surplus income and satisfy the relevant statutory conditions, they may qualify for the normal expenditure out of income exemption. This can be particularly attractive for grandparents who have surplus pension income, investment income or rental income and wish to pass value to future generations without waiting until death.  

Even where the exemption does not apply, lifetime gifts can still form part of a wider inheritance tax strategy, particularly where assets are unlikely to be required by the donor in later life. For many families, discussions around school fees become the starting point for a broader review of succession planning and intergenerational wealth transfer.  

Why Do Families Use Trusts for Grandchildren? 

Whilst paying school fees directly may be appropriate in some circumstances, many families explore trusts for grandchildren because they want to achieve more than simply meeting the next fee invoice. 

For example, grandparents may have accumulated capital that they would ultimately like to pass to their grandchildren but are reluctant to hand over substantial sums outright at a young age. They may also be conscious that the educational needs of grandchildren can change significantly over time. One grandchild may attend private school, another may require university funding and a third may need assistance with a property purchase several years later. 

A trust can provide a framework within which funds can be managed and applied as circumstances evolve. Rather than fixing entitlements today, trustees can often respond to changing educational, financial and personal needs over many years, ensuring that family wealth remains available when it is most needed. 

Bare Trusts and Discretionary Trusts  

The most appropriate structure will depend upon the family's objectives.  

Bare Trusts  

A bare trust for grandchildren is often suitable where grandparents wish to establish a fund for a particular grandchild.  

The trustees hold and administer the fund, but the beneficiary is absolutely entitled to the underlying assets. As a result, a bare trust can provide a relatively straightforward and tax-efficient structure where the objective is clear and the intended beneficiary has already been identified.  

Bare trusts can also offer income tax advantages in certain circumstances. As the beneficiary is generally treated as entitled to the trust income and gains for tax purposes, their own personal allowances and tax bands may be available. Where a beneficiary has little or no other taxable income, this can result in tax efficiencies that may not be available if the assets were held within a different trust structure. 

The principal limitation is that the beneficiary's entitlement is fixed from the outset. Whilst this certainty is attractive in some families, it provides less flexibility if circumstances change or if the grandparent later wishes funds to be applied differently between beneficiaries. 

Discretionary Trusts  

Where flexibility is a priority, a discretionary trust will often be more appropriate. They can also provide a greater degree of asset protection, as beneficiaries do not have an automatic entitlement to the trust fund. 

Rather than giving any beneficiary a fixed entitlement, discretionary trusts allow the trustees to decide who should benefit, when they should benefit and the extent of that benefit.  

This can be particularly valuable where:  

• there are several grandchildren;  

• educational needs may differ between beneficiaries;  

• family circumstances are likely to change over time;  

• future university or postgraduate education costs are uncertain; or  

• grandparents wish to retain greater control over how funds are applied.  

Discretionary trusts are frequently used by families who want to create a lasting fund capable of adapting to future generations' needs rather than fixing entitlements from the outset.  

Whilst they involve greater administrative and tax complexity than bare trusts, many families regard that flexibility as one of the principal advantages of trust planning.  

How Do a Gift, a Bare Trust and a Discretionary Trust Compare? 

Outright gift. Paying fees directly or gifting money to grandchildren is the simplest option. Regular payments from surplus income may be immediately exempt from inheritance tax; other gifts generally fall outside the estate after seven years. Once made, the grandparent has no further control over how the money is used. 

Bare trust. A bare trust for grandchildren holds funds for one named grandchild, with trustees managing the money until the grandchild reaches 18. For inheritance tax it is treated in the same way as an outright gift, and income is taxed as the grandchild's own. It suits a clear, defined fund for a single beneficiary. 

Discretionary trust. Trustees decide who benefits, when and by how much, across a group such as all grandchildren. It offers the most flexibility and protection, but gifts above the available nil rate band attract an immediate inheritance tax charge, and the trust may face further charges every ten years. It suits larger sums, several grandchildren and long-term planning. 

Looking Beyond School Fees 

In practice, trusts established to assist with education often become part of a much broader family succession strategy. 

We regularly see families create a trust with the intention of helping with school fees, only for the trustees later to use the fund to support beneficiaries through university, professional qualifications or the purchase of a first home. 

This flexibility is often one of the greatest attractions of trust planning. Circumstances change, educational paths differ and family needs evolve. A well-structured trust can adapt to those changes without requiring assets to pass outright at a time that may not be appropriate. 

Trusts as Part of a Wider Succession Planning Strategy  

For many families, the real value of a trust lies not in the payment of school fees itself but in the wider opportunities it presents.  

Questions such as:  

• How should wealth pass through the generations?  

• Should beneficiaries inherit outright or in stages?  

• How can future family circumstances be accommodated?  

• How can assets be protected whilst remaining available?  

• How can wealth be transferred in a tax-efficient manner?  

are often just as important as the immediate cost of education.  

A carefully structured trust can help address each of these issues whilst creating a framework for the management and preservation of family wealth over the long term. 

Frequently Asked Questions: Trusts for Grandchildren 

Can grandparents pay school fees without creating an inheritance tax liability? 

Potentially. Where payments satisfy the requirements of the normal expenditure out of income exemption, they may fall outside the grandparent's estate for inheritance tax purposes immediately. This can be particularly valuable where grandparents have surplus pension, investment or rental income. Professional advice should be taken before relying on the exemption. 

What are the advantages of trusts for grandchildren? 

Trusts for grandchildren can provide a structured way of passing wealth to future generations whilst retaining an appropriate degree of control and flexibility. They are often used to assist with education costs, inheritance tax planning, asset protection and longer-term family succession planning. 

Can a trust be used for university fees and other future costs? 

Yes. Whilst a trust may initially be established with school fees in mind, it can often support beneficiaries with university costs, professional training, housing deposits and other future needs, depending on the terms of the trust. 

Is a bare trust or discretionary trust better for grandchildren? 

Neither structure is universally better. Bare trusts can be attractive where funds are being set aside for a specific beneficiary and simplicity is a priority. Discretionary trusts generally offer greater flexibility where there are multiple beneficiaries, changing family circumstances or a desire for longer-term control. 

Is it better to gift money or use a trust for school fees? 

The answer will depend on your personal circumstances and what you are trying to achieve. Whilst direct gifts and school fee payments can be effective in some cases, many families find that a trust provides greater flexibility, protection and long-term planning opportunities. 

The most suitable approach will depend on factors such as the size of the fund, the number of beneficiaries, the family's objectives and any wider inheritance tax planning considerations. Seeking professional advice can help ensure that the chosen structure reflects your family's particular needs and long-term goals. 

How do I set up a trust for grandchildren? 

The most appropriate trust structure will depend on your family's circumstances and what you are seeking to achieve. A trust is usually established by a trust deed, with trustees appointed to manage the assets for the benefit of the chosen beneficiaries. Depending on the type of trust, there may also be ongoing tax, reporting and administrative considerations. 

Taking advice before transferring assets into a trust can help ensure that the structure reflects your family's objectives, the needs of the beneficiaries and your wider inheritance tax and succession planning arrangements.

Next reads

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Trust and estate planning advice 

Grant Saw's Trusts team advises individuals, families and business owners across Greenwich and South East London on inheritance tax planning, trust structures and succession planning. 

If you are thinking about your estate or considering how best to protect and pass on your assets, Charlotte and her team can help. 

Call 020 8858 6971 or email charlotte.warren@grantsaw.co.uk to discuss your circumstances. 

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This article is for general information only and is not legal advice. Laws and guidance change and outcomes depend on facts. If you need advice on your situation, please contact us. Grant Saw Solicitors LLP is authorised and regulated by the Solicitors Regulation Authority. 

Last updated: 19 October 2026