For grandparents who are within the scope of UK inheritance tax in the 2026/27 tax year, gifts towards school fees may fall within exemptions such as the GBP 3,000 annual exemption or the exemption for regular gifts made out of surplus income, depending on the facts. Larger one-off gifts are generally treated as potentially exempt transfers, and no inheritance tax would generally arise on them if the grandparent survives seven years, assuming no reservation of benefit.

The main tax to consider is UK inheritance tax on the grandparents' estate, rather than income tax for the family receiving the money. For many individuals, the domestic inheritance tax test now focuses on long-term UK residence rather than domicile. Domicile remains relevant in some treaty, transitional and anti-avoidance contexts. For more on planning education costs, see our guide to lump sum versus regular saving for education.

Using the annual and small gift exemptions

GOV.UK says each person can give away GBP 3,000 a tax year without it being added to their estate for inheritance tax. Any unused annual exemption can be carried forward to the next tax year only. A couple can each use their own exemption, so two grandparents may be able to give GBP 6,000 a year, or up to GBP 12,000 in a year where both carry forward the previous year's unused exemption.

There is also a small gifts exemption of up to GBP 250 per recipient per tax year, but it cannot be used for a person who has received another exempt gift from the same giver in that year.

Regular gifts from surplus income

For grandparents with comfortable pensions or investment income, a useful relief may be the exemption for normal expenditure out of income. GOV.UK confirms there is no fixed upper limit. In broad terms, the conditions are that:

  • the gift forms part of the grandparent's normal pattern of spending, such as regular termly payments
  • it is made out of income, not capital (HMRC generally treats income left unspent for more than two years as having become capital)
  • after making it, the grandparent still has enough income to keep their usual standard of living

Paying a share of school fees each term from pension income may fit this pattern. Good records matter, because the executors will need to show HMRC that the conditions were met.

Larger gifts and the seven year rule

If a grandparent gives a larger lump sum, for example to cover several years of fees in one go, it is generally treated as a potentially exempt transfer. If they die within seven years, the gift may become chargeable. Where the total of gifts in the seven years before death exceeds the GBP 325,000 nil rate band, taper relief can reduce the tax on gifts made between three and seven years before death. The standard inheritance tax rate is 40%.

Paying the school or giving to the family

Grandparents can pay the school directly or give money to the parents. Either way, the inheritance tax position depends on which exemption, if any, the gift falls under. Some families prefer the grandparent paying the school, so the purpose is clear.

There is also an income tax point. UK law can treat income from money that parents settle on their own minor children as the parents' income, above a GBP 100 limit. That rule is aimed at parents, so money from grandparents is generally not caught in the same way, subject to the facts. If the family wants money held for the child over a long period, a suitable structure may be worth considering, depending on circumstances.

If the parents or grandchildren live abroad, their country of residence may have its own rules on gifts. The UAE does not currently levy a gift tax on individuals, but Spain and Portugal have their own rules.

Illustrative example only, not a real client. Margaret and Ken live in Surrey, are long-term UK residents and have a combined pension income well above what they spend. They pay GBP 4,000 a term towards their grandson's school fees in Dubai, GBP 12,000 a year (3 x GBP 4,000), from surplus income, keeping records of their income and spending. Assuming the payments form a regular pattern, come from income and leave their standard of living unchanged, they may qualify as normal expenditure out of income. Separately, each may use their GBP 3,000 annual exemption to put money aside for his university costs.

Common mistakes

  • Paying fees from capital, such as savings or a property sale, and assuming the income exemption applies.
  • Not keeping records of the grandparents' income and spending.
  • Making a large lump sum gift without considering the seven year rule.
  • Overlooking gift rules in the country where the parents live.

A regulated financial adviser can help the whole family plan gifts well. Get in touch for a free introduction.

Sources and further reading

Last reviewed: October 2026. Tax year: 2026/27. Jurisdictions covered: UK, UAE. Rates, legislation and guidance change, so recheck before relying on this. Rules can differ between England and Wales, Scotland and Northern Ireland; tax residence is fact-specific; treaty outcomes depend on residence, domicile or nationality provisions; examples are simplified and omit reliefs, costs, exchange rates and anti-avoidance rules. This is general information, not financial, tax or legal advice. Take advice in the relevant country before acting.