What has caused the rise?
The ISC highlights that a significant increase in the amount employers are required to contribute into the teachers’ pension scheme is a major factor driving the sharpest increase since 2014. The latest data continue a longer term trend of high school fees inflation that has also been exacerbated by an ‘arms race’ between schools to add new facilities.
Despite the rising costs, pupil numbers at independent schools are estimated to be at record levels. A private education is an aspiration that many parents have for their children as they weigh up the advantages of small class sizes, often excellent sports facilities and the breadth of extra-curricular activities that many independent schools offer.
A big price tag
While independent schooling appears to be more popular than ever, attending them comes with a big price tag. The average annual term fee for a senior day school is now £5,009 (£15,027 a year) and £11,304 a term for boarding school (£33,912 a year) – though there are regional variations.
The most prestigious public schools can be in excess of £40,000 a year for boarders. This means that the cost of sending a child to a private school for their entire school education to the age of 18 could easily be in excess of £250,000 and by over £165,000 for just secondary school. And don’t forget that on top of these there are extra costs for trips, clubs, uniforms and sports kits. The already formidable costs of an independent schooling could potentially leap by 20% under Labour plans to add VAT to them.
Don't embark on a journey you can't finish
The ability to finance such costs on a pay-as-you-go basis out of taxed income is a colossal commitment. For families determined to give their children an independent education, it is important to plan carefully and early on to ensure they have a game plan to meet these costs throughout the school years. The last thing any parent wants to do is disrupt their child’s education and friendships part way through because they have run out of money.
Families need to talk
School fee planning will largely depend on whether the parents are going to have to pay for it all themselves, or whether other family members, notably grandparents, might be involved.
Grandparents are often pivotal in supporting children through private education and lifetime financial assistance can also help to alleviate a future Inheritance Tax liability. Inheritance Tax receipts for the Treasury have recently hit record levels.
In thinking about the prospect of sending a child to an independent school, it makes sense to have a family-wide discussion at the outset, but it is vital that grandparents do not gift assets that they may need themselves later.
This is why the cornerstone of a good financial plan is for an adviser to build a cashflow model of the parents’ or grandparents’ estimated future income and costs. This will show whether they are going to have sufficient resources to finance their own needs before giving any assets away.
Plan and invest
The first step is to establish when the child is expected to start at private school. Some parents may choose when the child is aged four, or perhaps prioritise the entry at age 11 or 13. With some assumptions on school fee inflation, it will help determine how much money needs to be generated each year and match any investment strategy to this liability profile. Higher risk investments such as equity funds can be used to fund costs that are many years away and cash or less volatile assets used for earlier years.
From a tax perspective it is best that grandparents use the money to do this directly rather than by gifting money to the parents. Regular gifts out of surplus income that do not affect their own lifestyle are exempt from Inheritance Tax. This means they could be used towards payment of fees or other costs. However, any lifetime gift is potentially exempt from an estate for the purposes of Inheritance Tax, providing the person who makes the gift lives another seven years.
Setting up a trust
A very simple option is to set up a “bare trust” on behalf of the child. This means the grandparents – or other family members – gift the money to the child, but they have full control over the assets and where they are invested until the child is aged 18.
Bare trusts are looked through for tax purposes meaning the beneficiary will be deemed the ultimate owner of the trust assets and taxed as if they owned them directly. This is useful as it allows the use of the child’s Income Tax and Capital Gains Tax allowances, which are typically available in full as children very rarely have any other taxable income.
By using the child’s allowances, investments held in a bare trust established by their grandparents could work out as being as tax-efficient as an ISA since any income generated would need to exceed their personal allowance, personal savings allowance or dividend allowance before becoming subject to tax. Withdrawals that involve selling an investment and crystallising a gain would take place against the child’s Capital Gains Tax allowance. If this is exceeded, it is likely that any Capital Gains Tax would only be incurred at the 10% rate as the child is highly unlikely to be a higher rate tax payer.
The seven-year rule
The gift into the bare trust would be a potentially exempt transfer for Inheritance Tax purposes, meaning there could be Inheritance Tax to pay if the grandparent doesn’t survive the gift by seven years. Nonetheless, that risk can be covered by a simple and cost effective seven-year insurance policy (depending on the grandparent’s health). That gift would need to be considered within the wider context of the grandparent’s financial circumstances to ensure that they can afford to gift this amount, and also in conjunction with other gifts that the grandparent has made over the preceding seven years (to ensure that we capture all of the possible Inheritance Tax risks).
Book a consultation
If you are thinking about the impact of private school fees, we can help you save for your children’s school fees. Book a free consultation with one of our expert financial planners to see what we can do for you.
This article was previously published on Tilney prior to the launch of Evelyn Partners.