The Institute for Fiscal Studies estimated that the average cost of private school fees across the UK in 2022/2023 was £15,200. This marks an increase of nearly 6% over the previous year.
Most parents pay school fees out of taxed income so the cost in real terms is far higher. For example, in order to generate £15,200 to pay the school fees, you would have to earn over £26,000 (for a 40% taxpayer).
In recent weeks, the Labour Party have also said that, should they win the next General Election, they will impose VAT at the standard rate of 20% with regard to private school fees which will further increase the cost.
To combat rising fees, it’s important for families to start tax planning as early as possible. Stevie Heafford, Tax Partner at HW Fisher, outlines three potential avenues to explore.
Most school fees planning is based on the concept of transferring the tax liability to the child such that their personal allowances and basic rate tax band can be used. Typically, an income producing asset (such as shares in a family company) would be settled into a trust in favour of the child. The income/distributions from the trust would then be used to pay the school or university fees and would be taxed on the child.
The challenge with this type of planning is that, if the funds/assets are provided by the parents then any distributions to children under 18 will still be taxed on them so the planning fails. However, it would still be effective for funding university costs for over 18’s.
It is therefore necessary for such structures to be funded by someone other than the parents, a grandparent for example.
There are a number of different types of trust structure available so professional advice is key.
Transfers for the education of children under the age of 18 or in full-time education are Inheritance Tax free. However, this only applies to transfers made by parents, unless the child is under the full-time care of another family member.
For family members who want to contribute, another option is to pay the fees out of their own surplus income. Gifts out of surplus income do not fall into the Inheritance Tax net so this would also help with planning in that regard, but it is important to be able to demonstrate that the gifts are being made from income and not capital.
If you’re considering this strategy, you should make sure you keep clear and detailed records as HMRC may request this information when you pass away.
There are also investment-based planning methods. Again, there are potential issues with parent funded investments, but bonds can be effective given the 5% tax deferred allowance such that capital could be advanced without creating an income tax charge for the parent settlors. As with any investment, advice would be needed from a financial adviser.
If you would like to discuss your own specific circumstances, please reach out to Stevie Heafford.