Having your student loans paid off is probably the best gift you could have on your graduation. This was the pledge made by billionaire Robert F. Smith to the 2019 graduates at Morehouse College in the US which will reportedly cost him about $40m.
If a UK philanthropist were minded to follow suit, they might wish to consider the tax implications before making such a generous offer.
The average student graduates with debts in excess of £50,000. Debts are personal, so the donor would be making a gift to each person. The gift, whether made directly to each student or to the Student Loan Company, would be a Potentially Exempt Transfer (PET) for inheritance tax (IHT) purposes.
If we assume that our mystery benefactor has not made any gifts in the past and ignore exemptions and reliefs, as long as he or she survives for seven years following the gifts, there can be no IHT implications.
On the other hand, if our good Samaritan were to die within three years of making the gifts, the recipients’ initial joy may turn to tears as they find out they have an IHT bill to pay.
The general rule is that the recipient is liable for the IHT on a PET and therefore each graduate could face a tax charge of £20,000.
Of course, were our patron well advised they could ensure that their Will stated that all PETs were to be made net of tax. Only in these circumstances would the estate pick up the IHT liability on the gifts.
Tax advisers may also suggest a more sophisticated solution of setting up a charitable trust (assuming the Charity Commissioners would approve the objectives).
In this case, the gift would be made to the charity under Gift Aid. The charity could reclaim £20 for every £80 gifted up to the amount of tax paid by our donor in the tax year.
If our patron wanted the charity to receive £40m in total, they would only need to gift £32m and the charity would reclaim £8m from HMRC.
Assuming they had enough income, our donor would also get tax relief of up to £10m – in other words a tax rebate received by them personally. In the UK a generous gift of £40m could therefore actually cost the donor £22m and the government £18m.