After UK chancellor of the exchequer Rachel Reeves announced that VAT at 20 per cent will be introduced on private school fees, legal experts at Irwin Mitchell, which provides legal and financial services to businesses, discuss the impact.

Legal experts at Irwin Mitchell recently highlighted that the new regulation to impose VAT at 20 per cent on private school fees from January 2025 will have implications for trusts paying school fees for beneficiaries.

Trusts will need to account for the additional 20 per cent VAT on school fees, Irwin Mitchell said in a note. Trustees must manage and allocate the trust fund to afford these increased costs effectively.

Trustees may also need to revisit their tax planning strategies to ensure that they can cover the increased costs. This might involve adjusting the trust’s investments or distributions, the firm continued.

Settlors – parents or grandparents – who initially set up the trust fund will also need to assess whether they need to top up the trust fund to cover the additional costs. They must consider the impact of such top-ups on their overall financial planning, the firm added. The structure of the trust might also need to be reviewed to ensure that it remains tax-efficient under the new VAT rules.

“It was generally expected that these VAT changes would not apply until at least September 2025. Bringing forward the VAT implementation by at least nine months will be unwelcome news for private schools and parents and these changes will require careful planning to manage the impact effectively,” Ian Bond, lifestyle and estate planning partner at Irwin Mitchell, said. “Trustees would be wise to review and potentially adjust their investment strategies to ensure sufficient funds are available to cover the increased costs,” he added.

“With a new government in place, this is unlikely to be the only change we’ll see that affect finances. It’s important to get the right professional advice on how best to prepare for the changes we might see announced in the coming months,” he continued.

Reeves has also announced that the government will have to increase taxes in the October budget, sparking concerns that she may go further with the inheritance tax side, such as making it more difficult to gift money and assets, such as farmland, tax free.

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at £325,000 ($413, 000). Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief. The alarm was also sounded for a hike in the capital gains tax. See more commentary here.

In addition, the UK government has moved ahead with its pre-election promise to remove the “outdated concept of domicile status” and has introduced a four-year residence-based system, taking effect from the start of the new tax year in April 2025. See more commentary here.