Scholarships (480: Chapter 18)
Find out about tax charges on scholarships.
Overview
18.1
Section 776 ITTOIA
Although the income from a scholarship is exempt from a tax charge in the scholar’s hands, scholarships awarded to students by reason of their parents’ employment will normally give rise to a tax charge on the parent.
Section 215
‘By reason of the employment’
18.2
Section 212
For the purpose of taxing a director or employee with the value of a scholarship provided by reason of their employment for a member of their family or household the phrase ‘by reason of the employment’ is given an extended meaning.
As well as covering the situations described in chapter 1 paragraphs 1.23 to 1.25, a scholarship is treated as having been awarded ‘by reason of’ the parent’s employment if it’s awarded under ‘arrangements entered into’ by the employer or any person connected with the employer.
This applies whether or not expense is directly incurred by the employer and covers situations where, for example, the expense is met by an educational trust set up by the employer or anyone else under arrangements made with the employer or someone connected with the employer.
As to the meaning of connected person see paragraph 18.6 below.
‘Fortuitous’ awards
18.3
Section 213
The legislation excludes from a tax charge any scholarship provided from a trust fund or under a scheme for full-time education or instruction where:
-
in the relevant tax year not more than 25% by value of the awards go to members of the families or households of the employees whether or not the employee:
(a) Is resident or ordinarily resident in the UK, or
(b) The duties of the individual’s employment are performed outside the UK, and -
the award was not provided by reason of the parent’s employment (disregarding for this purpose only the extended meaning given to this phrase in paragraph 18.2)
18.4
Scholarships awarded to the children of all employees – whether or not the employees are within the special rules described in this guide or are working overseas – are taken into account for the purpose of the 25% test mentioned above. The 25% test cannot operate to prevent a tax charge unless the connection between the award and the parent’s employment is purely fortuitous.
Cost of the benefit
18.5
Section 214
If the provision of a scholarship from a trust fund is taxable as an employment-related benefit the cost of the benefit (that’s, the amount treated as the employee’s income) is the total of the payments made from the fund to the person holding the scholarship.
Definitions
18.6
Section 211(3) Section 839 ICTA 1988
The word ‘scholarship’ as used in this chapter is defined as including an exhibition, bursary or other similar educational endowment. The term ‘connected person’ covers most family relationships, the trustee of a settlement where the trustee is connected with any person who’s a settlor or with a body corporate connected with the settlement, and partners except as regards certain commercial transactions.
Similarly, companies are connected with other companies if they’re controlled either directly or indirectly by the same person or by a person connected with them. There are special definitions for these purposes of:
- settlement
- settlor
- company
- control
- relative