Paying school fees across an ocean, and who gets taxed on it

It is who pays whom, rather than how much anybody actually pays. The amount rarely changes the tax treatment at all, while the route the money takes can change it completely, in both countries at once.

Two systems ask different questions. Britain now charges VAT on private education, and America asks whether a payment counts as a gift.

So the planning is about structure. Getting the route right costs nothing and settles both questions at once.

Private education stopped being exempt, so fees changed overnight. From 1 January 2025, education, boarding and vocational training provided for a charge by a private school in the UK became subject to VAT at the standard rate.

The GOV.UK guidance on applying VAT to private school fees sets out the measure and its scope.

Prepayments made from late July 2024 for terms starting on or after the change are also caught. Paying a year ahead no longer sidesteps the charge.

Budget for the change if you are comparing schools. A fee list published before 2025 may look very different once VAT is added.

No, and the boundaries matter to any family currently choosing a school. The measure targets private schools charging for education, so state schools and certain nursery provision sit outside it.

However, the detail runs to several pages of guidance. Individual schools have also taken different approaches to absorbing or passing on the cost.

So ask the school directly what its fees now include. That is a far more reliable answer than a general rule about the sector.

Anyone can pay, although the route decides the American treatment entirely. Paying tuition directly to the institution falls outside US gift tax, and that exclusion carries no dollar limit at all.

The IRS is specific about the conditions. The payment must go directly to a qualifying educational organisation, and it must be for tuition rather than anything else.

The IRS questions and answers on gift taxes set out the exclusion, which covers foreign as well as domestic institutions.

The exclusion sits alongside the ordinary annual allowance rather than replacing it. So a grandparent can pay tuition directly and still make a separate gift in the same year.

Because the exclusion follows the payment, not the intention behind it. Money given to a parent who then settles the bill is an ordinary gift to that parent, however clearly everyone understood its purpose.

Importantly, that distinction costs nothing to get right. A grandparent paying the school directly achieves the same outcome for the family with a cleaner tax position.

In our practice we see the wrong route taken far more often than the wrong amount. A phone call to the bursar usually solves it.

Set the route up once and repeat it each term. Consistency also helps if anyone reviews the arrangement years later.

Tuition, and only tuition, which is considerably narrower than most families tend to assume. The IRS states that no educational exclusion applies to books, supplies, room and board, or similar expenses.

So a boarding bill usually splits in two. The teaching element can fall within the exclusion while the boarding element does not.

Therefore ask the school for an invoice that separates the components. Without it, the whole payment is harder to characterise.

Then US gift tax is simply not their concern, and the question moves to the recipient instead. A British grandparent making a gift faces no American gift tax on it whatsoever.

The American who receives a large gift from a foreign person may have a reporting duty, though, even with no tax to pay. Our guide to Form 3520 and foreign gifts explains the thresholds and the penalty.

Paying the school directly can sidestep that question entirely, because the money never reaches the American. That is another reason the route matters.

Keep evidence of where the money came from either way. A clear trail answers the question before anybody has to ask it.

Not as a gift, because Britain has no gift tax at all. What Britain has instead is inheritance tax, which can reach gifts made in the seven years before a death.

However, several exemptions keep ordinary generosity outside it. The annual exemption covers gifts up to a set amount each tax year, and regular payments from surplus income can qualify separately.

The GOV.UK guidance on gifts sets out the seven year rule and the exemptions. School fees paid regularly from income are exactly the pattern that exemption contemplates.

Record the date and amount of each gift. Seven years is a long time to rely on memory alone.

It is the British exemption most worth understanding for school fees. Gifts that form part of normal expenditure out of income, leaving the giver able to maintain their usual standard of living, can be exempt from inheritance tax immediately.

The conditions are specific, and the evidence matters just as much. HMRC looks at the pattern of giving and at whether income genuinely covered both the gifts and ordinary living costs.

So keep a record from the start. A simple annual note of income, outgoings and gifts is what makes the claim straightforward years later.

Regular termly payments fit the pattern better than one large transfer. The rhythm of the giving is part of what HMRC looks at.

Sometimes, and the answer differs between university and school-level education in America. Some foreign institutions do qualify for American education accounts, while others do not, so the specific school matters here.

The rules for school-level withdrawals are narrower and have changed more than once. The IRS questions and answers on 529 plans cover the current position.

Therefore check the specific institution before withdrawing anything. A non-qualifying withdrawal brings tax and a penalty on the earnings.

The same gift rules apply, so paying the institution directly still works perfectly cleanly. However, university opens American education reliefs that school-level fees do not, where the institution itself qualifies.

Those reliefs have income limits and their own conditions. For a family whose income sits largely abroad, they often deliver less than expected.

Check the institution's eligibility before planning around any of it. A British university may or may not qualify for a given American account or credit.

Eligibility lists change from year to year. Check again before each academic year rather than relying on last year answer.

Paying them does not by itself, although the money moving around certainly can. Large transfers into accounts an American holds or controls feed the foreign account reporting in the ordinary way.

Our guide to Form 8938 and the FBAR sets out those two regimes. Both run on balances rather than on what the money was for.

Where a child holds an account in their own name, check whether the child has any reporting of their own. Our guide to junior ISAs and US tax covers that ground.

Check the position in any year a large sum lands. A single transfer can lift a balance over a threshold that was never near it before.

Only the practical part, which is who is paying the invoice and from which country. Schools handle third-party payers routinely, and most bursars will invoice a grandparent directly on request.

Ask for the invoice to name the payer and split the charges. That single document supports the American position and the British record.

Keep copies with your tax papers each year. Fees repeat annually, so a tidy first year makes every later one straightforward.

Tell the school early in the admissions process. Changing a billing arrangement mid-year is slower than setting it up correctly.

Settle this before the first invoice rather than during the second term.

Write the arrangement down, because the family will repeat it every year.

Agree the route with everyone paying, including any relative abroad. A shared understanding avoids a well-meant transfer arriving in the wrong place.

Take an illustrative example: American grandparents in Boston want to pay school fees for a grandchild in London. Their first instinct is to send the money to their daughter.

That would be an ordinary gift to her, using up her annual exclusion and raising a reporting question for the American side of the family.

Instead, they pay the tuition element directly to the school. The tuition then falls within the American exclusion, and they handle the boarding element separately.

Their accountant suggested the change before the first term. Doing it later would have left one year on the wrong footing.

The first is routing the money through a parent. It converts an excluded tuition payment into an ordinary gift.

The second is treating a whole boarding invoice as tuition. The exclusion does not reach room and board.

The third is prepaying to beat a change without checking the rules. The VAT measure caught certain prepayments deliberately.

The fourth is leaving no paper trail. Without invoices naming the payer, an excluded payment is hard to evidence.

We structure education funding through our treaty relief service, covering the gift position, the reporting and the British inheritance tax angle. Usually the fix is a different payment route rather than a different amount.

If family money is helping with school fees, send us the outline and we will set out the cleanest route at a fixed fee agreed first. This article is general information, not personal tax advice; take advice on your own facts from a qualified adviser.