According to the IFS, the average cost of private school fees has risen by 20% in real terms since 2010 — and the cost could go up even more depending on which party is successful at next month’s general election.
One of the key policies in the Labour Party’s manifesto is to scrap private school’s 20% VAT exemption and business rate relief. The Daily Telegraph estimates that the addition of VAT onto fees could cost the average family just under £62,000 over the course of a child’s education.
Stevie Heafford, Tax Partner at HW Fisher, says:
“More than half a million children attend private school in the UK, and many parents will be worried about how they are going to afford increased fees. There’s been a surge in families looking at paying for multiple years up front to avoid paying VAT if the Labour Party comes into power, but the reality is that, even if these arrangements actually work, HMRC could easily claim the money back from these families through retrospective tax legislation. With this in mind, effective school fees planning has never been more important, and families must start as early as possible.”
In this article, Stevie explains three avenues to explore.
1. Transfer your tax liability
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, 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 structures available so professional advice is key.
2. Make the most of your gifting allowance
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, 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.
3. Consider investment-based planning methods
There are also investment-based planning methods. Again, there are potential issues with parent-funded investments, but bonds can be effective due to the 5% tax deferred allowance, which could allow capital to 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 be interested in tailored advice for school fees planning, you can get in touch with Stevie here.
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