Normal expenditure out of income is the UK exemption that fits a grandparent. The US tuition exemption is direct-payment-only and covers tuition, not boarding. How to satisfy both.
A grandparent paying UK school fees makes a transfer of value for inheritance tax unless an exemption applies, and the normal expenditure out of income exemption is the cleanest route. If anyone is a US person, the US gift tax qualified transfer rule covers tuition paid direct to the school, and nothing else.
Grandparents fund school fees because it is the one gift everybody agrees on. It helps immediately, it cannot be spent on anything foolish, and it moves money out of an estate that is probably too large. In a wholly British family it is well-trodden ground. Add an American somewhere in the family, which in practice means a US-citizen parent, a dual-national child or a grandparent who never gave up a green card, and the arrangement has to satisfy two systems that define the gift differently and exempt different parts of it.
Because value leaves the grandparent and arrives somewhere else. UK inheritance tax is charged on transfers of value, and a lifetime transfer that is not exempt is a potentially exempt transfer, dropping out of account only if the donor survives seven years with relief tapering in the final years (gov.uk: Inheritance Tax). Measured against a nil rate band of £325,000 and a residence nil rate band of £175,000 where the conditions are met, tapering by £1 of band for every £2 of estate above £2m, several years of senior-school fees is not a rounding error.
Identifying the donee matters more than families expect. If the parents signed the school's contract and the grandparent settles the invoice, the grandparent has discharged the parents' obligation, which in substance is a gift to the parents. If the grandparent contracts with the school directly, it looks more like a gift for the grandchild's benefit. In a US-connected family that distinction decides whose annual exclusion is used, whose return reports it, and whether the American tuition exemption is available at all.
Dispositions for the maintenance of the family is the one people reach for and the one that usually fails. IHTA 1984 s.11 exempts dispositions for the maintenance, education or training of a child, but it is framed around a parent or step-parent, and around a person who maintains a child not in a parent's care. HMRC's outline of the section is explicit about whose dispositions qualify (HMRC Inheritance Tax Manual, IHTM04171). A grandparent whose grandchild lives happily with their own parents is generally outside it. Where a grandchild genuinely is in a grandparent's care, the position is different and worth testing properly rather than assuming either way.
The annual exemption and the small gifts exemption both exist and both help at the margin, but their fixed amounts have not kept pace with school fees and they are consumed quickly. They are worth claiming and should not be relied on as the plan. Check the current amounts against HMRC's published allowances before building anything around them.
Normal expenditure out of income is the real answer, and the reason grandparents are so often better placed than parents to fund fees. A grandparent with a substantial pension, dividend or rental income stream and a modest lifestyle can exempt an unlimited amount, year after year, with no seven-year clock at all.
Three conditions, all of which must be satisfied (HMRC Inheritance Tax Manual, IHTM14231).
It must be normal. HMRC reads this as habitual or regular, forming part of a settled pattern rather than a one-off (IHTM14241). A single lump sum covering the next five years of fees is the hardest version to defend; a standing commitment, documented at the outset and paid termly, is the easiest. Writing to the family or the school to record the intention to meet fees for the duration of the child's education is cheap and genuinely useful evidence.
It must come out of income, not capital. This is where most claims fail (IHTM14250). Income means income of the year on normal accounting principles rather than taxable income, and it excludes capital receipts, the capital element of a purchased life annuity and realised investment gains. Income accumulated over a long period can lose its character and become capital. Selling an investment to pay the fees is a capital payment and will not qualify, however comfortable the grandparent is.
It must leave enough income to maintain the usual standard of living. A grandparent cannot fund fees out of income and then dip into capital for their own living costs, because doing so shows the fees were not genuinely affordable out of income.
The practical consequence is record-keeping. The exemption is claimed by the executors on the inheritance tax schedule for gifts, years later, against a year-by-year statement of income, expenditure and gifts. A grandparent who keeps that schedule contemporaneously hands their executors a claim that is likely to succeed; one who does not leaves them reconstructing a decade of bank statements.
They bite as soon as a structure appears. Paying an invoice is straightforward. Settling money into a trust or company to pay fees from, where the grandparent can benefit, take income or get the capital back, risks the reservation of benefit rules, which can pull the whole value back into the estate on death (HMRC Inheritance Tax Manual, IHTM04071). A school fees trust in which the grandparent is a potential beneficiary, or over which they keep a power to unwind, is the classic trap: the gift is made and then undone, and the normal expenditure exemption is lost into the bargain because the payments are now into a structure rather than for maintenance.
Far more generously than most families realise, and far more narrowly than they then assume.
A US person who pays tuition directly to a qualifying educational organisation on behalf of any individual makes a qualified transfer, which is excluded from gift tax entirely. There is no dollar ceiling, it does not consume the annual exclusion, and it does not require a Form 709 (IRS: Frequently Asked Questions on Gift Taxes). A UK independent school will ordinarily satisfy the definition of an educational organisation; it is worth confirming for the specific school rather than assuming.
The limits are where the money is lost:
Everything outside the qualified transfer is an ordinary gift, measured against the annual gift tax exclusion of $19,000 per donee and then against the lifetime basic exclusion amount of $15,000,000 for deaths and gifts in 2026 (IRS: What's New, Estate and Gift Tax). A US-person grandparent covering a full boarding bill for two grandchildren can therefore be filing a Form 709 for the non-tuition half while the tuition half passes free of any reporting at all. Splitting the invoice properly, with the school billing tuition separately, is a five-minute administrative change that produces a real result.
Then there is usually no US gift tax to worry about. A non-resident, non-citizen donor is within the US gift tax net only on gifts of US-situs tangible property and US real estate, so a sterling transfer from a British grandparent to a British school is outside it however large.
The obligation moves to the recipient. A US person who receives large gifts or bequests from foreign persons reports them on Form 3520, and the thresholds differ depending on whether the donor is a foreign individual or a foreign entity, with gifts from related donors aggregated (IRS: Gifts from Foreign Person). Confirm the current thresholds before concluding a year is below them. Two points catch people out. This is reporting, not tax: nothing is owed, and the penalty is nevertheless a percentage of the amount received, per form, per year. And a payment that discharges a US-person parent's obligation to the school can be a reportable receipt by that parent even though the money never touched their account.
The UK reason grandparents are the right funder is a rule about parents. Where a parent settles money on their own unmarried minor child, the settlements legislation taxes the income back on the parent, so the gift achieves nothing for income tax (HMRC Trusts, Settlements and Estates Manual, TSEM4300). That rule does not apply to grandparents. Money a grandparent settles on a bare trust for a grandchild produces income taxed as the child's own, against the child's own allowances, which is why fee-funding bare trusts are a standard British arrangement.
For a US-citizen grandchild, every part of that becomes more complicated. The child is a US taxpayer from birth, with a filing obligation driven by its own income rather than by its age. The UK funds and investment trusts typically chosen inside such an arrangement are passive foreign investment companies for US purposes, with their own punitive default regime and annual election mechanics, which we cover in PFIC rules for US investors abroad. Depending on how the arrangement is documented, the US may regard it as a foreign trust, bringing Forms 3520 and 3520-A into play, which we set out in foreign trusts and Form 3520. And if the child holds or has authority over foreign accounts exceeding $10,000 in aggregate at any point in the year, an FBAR is due on 15 April with an automatic extension to 15 October (FinCEN Report 114, via the IRS). Our notes on bare trusts and designated accounts in US families and the Junior ISA for US-citizen children go through the account types one by one.
Fee funding is one of the few areas where the UK and US answers can both be optimised at once, but only if the invoice, the contract and the payment route are set up beforehand. Retrofitting is rarely possible, because the payments have already been made in the wrong name from the wrong account. Every position we take is reviewed and signed off by a licensed professional, an IRS Enrolled Agent who is also an ACCA-qualified accountant, so the exemption claimed in Britain and the transfer reported in America rest on the same facts.
Our US and UK private client tax service handles this kind of multi-generational funding, and the wider annual compliance sits with our US-UK tax specialists. Book a confidential consultation or scope the work before the next termly payment goes out, and read UK inheritance tax and long-term residence for US citizens alongside this if the grandparent's own estate position is unsettled.