Grandparents rush to pay grandchildren's university fees to cut inheritance tax bills

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Two-thirds of wealthy parents and grandparents say upcoming tax reforms have made them more likely to fund education costs

Grandparents are increasingly helping to pay for their grandchildren's university costs as families look for ways to reduce future inheritance tax bills.

The upcoming tax changes are encouraging wealthy families to give money away during their lifetime rather than leave it behind as part of an inheritance, new research suggests.

A survey of more than 1,000 wealthy grandparents by wealth management firm Rathbones found 67 per cent said forthcoming tax reforms had made them more likely to help fund education costs while they are still alive.

The findings come as more than 300,000 students received their A-level results on Thursday and families prepare for the cost of university.

A quarter of grandparents said tax planning was a "major factor" in their decision to contribute towards school or university fees, while nearly seven in ten said inheritance tax played at least some part in their thinking.

Some grandparents are covering a significant chunk of the university bill themselves.

Among those already providing financial support, one in five said they pay most or all of their grandchildren's higher education costs. Seven per cent said they cover virtually the entire bill.

However, family support does not necessarily mean students avoid borrowing altogether. Around six in ten grandparents said their contributions are being used alongside student loans to meet the cost.

Families are also using several different ways to provide the money.

More than a third of grandparents give cash directly to their grandchildren, while a similar proportion give the money to the students' parents.

Around 34 per cent pay schools or universities directly, while the same proportion have savings or investments specifically set aside for education.

Among families combining their own money with student loans, 31 per cent said their contribution was relatively small compared with the amount borrowed.

A further 28 per cent said the cost was split roughly equally between family support and student borrowing.

Overall, almost two-thirds of those surveyed said grandparents either already contribute towards education costs or are expected to do so.

The trend comes ahead of a major inheritance tax change due to take effect from April 2027.

Under the reforms, unused pension pots will be brought within the scope of inheritance tax for the first time, potentially giving families another reason to consider passing wealth to younger generations during their lifetime rather than waiting until death.

Until now, unspent pension wealth could be passed to beneficiaries outside a person's taxable estate, but the reform is expected to drag thousands of additional families above the tax-free threshold of £325,000.

Inheritance tax is charged at 40 per cent on the portion of an estate exceeding that limit. Individuals can gift up to £3,000 annually without incurring any tax, but larger transfers only escape the charge entirely if the donor survives for at least seven years afterwards.

Deaths within that window trigger a sliding scale of tax, starting at the full 40 per cent rate during the first three years and tapering to 8 per cent between years six and seven.

Malvee Vaja, chartered financial planner at Rathbones, said: "For many grandparents, helping with education can achieve two objectives at once: supporting children and grandchildren at a crucial stage of life while potentially forming part of a broader intergenerational wealth transfer strategy."

She added: "The Bank of Grandma and Grandad is no longer just helping younger generations onto the property ladder. Increasingly, it is helping fund education too. Many grandparents tell us they would rather provide support when the impact is immediate and visible than leave a larger inheritance later."

Ms Vaja also flagged a troubling societal dimension to the trend. Over eight in ten respondents believe escalating education costs mean life prospects are becoming ever more tied to a family's financial resources.

"As education becomes more expensive, there is a risk that opportunities become increasingly linked to family wealth rather than ability and ambition alone," she warned.

The financial burden of a degree is also weighing heavily on parents, with previous Rathbones data showing that 26 per cent of those who contribute or plan to contribute anticipate spending upwards of £50,000 per child on university costs.

Tuition fees for the 2026-27 academic year stand at £9,790, while maintenance loans stretch to a maximum of £10,830 outside London, or as little as £4,915 for students from higher-earning households.

The Department for Education has confirmed that student loan interest rates for the coming year will remain as high as six per cent, fuelling anger among graduates who feel crushed by ballooning repayments.