Video: Tax implications of paying your grandchild’s school fees

As a grandparent you may want to start an investment for your grandchild or help with their education costs. While this is an invaluable gift, you need to consider the tax implications.

Donations over R100 000 in any tax year will attract donations tax payable by the donor. This means you can only donate a total of R100 000 a year before paying tax. This includes a contribution to an investment or helping the parents pay for school fees.

According to BDO Wealth Advisers, an exception could apply if the donation is towards the maintenance of a person – so this would be if the grandparent is supporting the grandchild or the parents in terms of their food, clothing, accommodation, medical or education costs. But in order to get an exemption, you would need to prove this to SARS. The exemption does not provide for a grandparent helping to send a child to a private school, for example.

So, if you don’t want to pay tax, the maximum a grandparent could contribute to school fees, irrespective of the number of grandchildren would be R100 000 a year.

In terms of starting an investment account, the same limits would apply, but there are also investment taxes to consider. Any capital gains, dividend or interest income would be taxable when the child starts to earn an income. The best way to avoid these taxes would be to open a tax-free savings account in the grandchild’s name

Even if you gave your grandchild jewellery or a new car, if the value exceeds R100 000, donations tax will apply.

Alternatively, you could bequeath these items in the terms of your will. As the grandchild would be a beneficiary of the estate, donations tax would not apply. If the value of the estate is less than R3.5 million, then no estate duty is paid.

This article first appeared in City Press.

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