School Fees Tax Planning Guide

School books and pencils

A private school education is an investment into your children’s (or grandchildren’s) future, but comes at a significant cost. According to the Independent Schools Council (ISC), the average fee per term was £5,064 in 2021, which equates to over £15,000 per year – and this is only set to increase as time goes on.

With the right planning in place, from setting up Stocks & Shares ISAs (Individual Savings Accounts), to Gifting and using Trusts or FICs, there’s a range of tax efficient savings you could make on school fees. Continue reading our tax planning guide for private education to find out more, or contact us today for further advice.

Stocks & Shares ISAs for School Fees

Investing in a Stocks & Shares ISA is a tax-efficient way to accumulate funds for your children’s school fees – using this savings vehicle, you can invest in a broad range of assets for potential growth*.

The annual ISA allowance for a UK adult is currently £20,000 per year (or £40,000 per couple), and all capital gains and income are tax-free. Interest rates on cash savings accounts remain low, and you can withdraw money to pay school fees at any time, penalty-free.

Parents could also consider setting up a Junior ISA, but this is better suited to saving for university fees, as funds cannot be accessed until the child turns 18. The money also belongs to the child, not the parents, and the annual allowance is only £9,000.

*Please be aware that the value of investments can go down as well as up, and you may get back less than you invested.

IHT-Exempt Gifts from Grandparents

Another tax-efficient way to pay school fees is through gifts from grandparents – this also saves the parents bearing all the financial burden.

If the gifts are below the annual gift allowance (£3,000 per grandparent), then there won’t be any Inheritance Tax (IHT) liabilities – or, if the grandparent lives beyond seven years after making the gift, there’s the potential for higher sums of IHT-free gifts.

Plus, if grandparents have income surplus to their needs, they could take advantage of the IHT exemption (if all conditions are met, and the income does not fall within any of the exceptions) as soon as they’re made. The exemption applies where the taxpayer (the grandparent) can show that the gift (or part of it):

  • Formed part of their normal expenditure,
  • Was made out of income,
  • And left them enough income to maintain their normal standard of living.

It does not apply to gifts on death, deemed PETs, some life policy premiums, and many more. This is a very complex area, so we recommend seeking expert advice before gifting to pay for school fees. You must also consider the impact this planning may have on other taxes, including Income Tax, Capital Gains Tax, Inheritance Tax, and more.

Trusts for Grandchildren

Grandparents can also set up a Trust to pay their grandchildren’s school fees tax-efficiently. A Trust is a legally binding arrangement, in which assets are held by the Trustee (in this case, the grandparent), for the benefit of their Beneficiary (in this case, the grandchild).

The assets in the Trust are taxed as if they belong to the grandchild, meaning that families can take advantage of the child’s Personal Tax allowance (£12,570 for the 2022/23 tax year).

Once set up, a series of regular gifts can be made into the Trust, according to arrangements specified by the grandparents.

There are three types of Trust grandparents can set up to pay for school fees:

1. Bare Trust

Setting up a Bare Trust comes with the benefits of no IHT entry charges, exit charges or 10-year charges. It is also the best approach where the asset settled is either cash (and so no Capital Gains Tax), or an asset with little to no gains.

However, families should be aware that when the child turns 18 (or 16 in Scotland), they could take control of the Trust’s assets – and, a Bare Trust should only be set up if there are no concerns about the grandchild’s entitlement to state benefits.

2. Discretionary Trust

Setting up a Discretionary Trust is a better approach to take if the asset settled has a high gain. This type of Trust has the benefit that any capital gains on assets settled can be held over by the settlor – however, there could be IHT entry charges, exit charges or 10-year charges.

The capital and income always belong to the trust, so the grandchild won’t take control when they are 18, and it won’t affect the grandchild’s entitlement to state benefits.

3. Life Interest Trust

Grandparents could consider a Life Interest Trust if they would like to maintain discretion over the Trust’s capital. This would still mean that income can be paid out to the beneficiaries, however again, there could be IHT entry charges, exit charges or 10-year charges.

Family Investment Company (FIC)

Parents or grandparents may also wish to consider using a Family Investment Company (FIC) as an alternative to Trusts. Essentially, an FIC is a private company with family members as shareholders – the aim being to maintain control over assets, as well as the accumulation and distribution of wealth and income, in a structured manner.

Need Tax Planning Advice for School Fees?

Are you a parent or grandparent looking for tax-efficient ways to pay school fees? It’s important to start planning as early as possible – our experienced team will give you a realistic overview of the costs involved, and how you could save tax through a tailored plan. Contact us through our online form, call 01743 562430, or email hello@mercianaccountants.co.uk today.

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