A large price tag
Despite these rising costs, pupil numbers at independent schools are estimated to reach record highs. Many people believe that paying for a child’s schooling is an investment in their future but, as with any other investment, you need to work out how you will fund it.
The average 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)*, although there are regional variations. In London, fees tend to be around 8-15% higher. This means that for a child born this year, the estimated cost of their education would be a staggering £534,702**. And don’t forget on top of this there are extra costs for trips, clubs, music lessons, uniforms and sports kits.
The ability to finance school fees on a pay-as-you-go basis out of taxed income is a colossal commitment. No parent wants to disrupt their child’s education and friendships part way through because they have run out of money. It’s therefore incredibly important to plan carefully and early on to ensure these costs can be met.
Families need to talk
In thinking about sending a child to an independent school, it makes sense to have a family-wide discussion at the outset. 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 who have previously put their own children through private schooling may want to do the same for their grandchildren. In providing this financial assistance, they can also help to alleviate a future Inheritance Tax liability themselves.
The problem here is that the cost of school fees has risen dramatically in the years since these grandparents sent their own children to school. For some people, what they may have been able to readily afford in the past might not be so easy to pay for today, especially if they are now retired.
Many parents also look to fund their child’s education themselves. We often see clients with a small child or baby on the way coming to us for suggestions on how to fund the cost of their education. Although it would be reasonable to assume that their salary will increase over time, the amount and frequency of these rises can be unpredictable and they are often looking to fund the child’s education alongside a substantial mortgage. They need to establish how they will continue to pay for both.
How to make sure you will have enough money
The cornerstone of a good financial plan is for a financial planner to build a cashflow model of the parents’ or grandparents’ estimated future income and total outgoings. Cashflow modelling involves working with a financial planner to build a complete picture of the parents’ and grandparents’ finances now and into the future. With the help of powerful computer software, the details of their income, outgoings, savings and other assets are analysed. The financial planner can then consider their future goals, like paying for a child’s education, and create a projection of their finances.
Given the statistics available on the ever-increasing cost of school fees, the financial planner can realistically estimate what their future expenditure will be. They will then assess this in conjunction with their current financial situation and look at how many years there are until the child starts school to predict how much they can afford to save in this timeframe, while taking inflation and investment growth into consideration.
Plan and invest
The first step is to establish when the child is expected to start private schooling. Some parents may want them to start at age four, or perhaps prioritise entry at age 11 or 13. Next, with some assumptions on school fee inflation, a financial planner can determine roughly how much money needs to be generated each year and recommend an appropriate investment strategy to cover the costs. Higher risk investments, such as equity funds, could potentially be used to fund costs that are many years away and cash or less volatile assets could be used for earlier years.
By making these investment decisions early, there is a potential for savings to be made. For example, a family aims for a child born this year to start at nursery from age three and board from age 11 until 18. The projected £534,702 average cost could be met if the family were able to invest £288,146 now. If they achieved an annual 5% growth rate (this is 1.3% p.a. higher than the assumed inflation rate), they would stand to make £246,556, which would almost halve the total cost.
A very significant portion of the heavy lifting would be done by investment growth. Given that growth would be the overall aim, the sooner these investments are set up, the better. While you can obviously continue to invest while your child is in school, putting money aside as soon as they’re born could be highly beneficial.
Potential Inheritance Tax benefits
If grandparents are paying towards the school fees, from a tax perspective it is best that they do this directly rather than going through the parents in order to potentially reduce their Inheritance Tax liability. 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. With professional advice, these trusts are straightforward and cost-effective.
Bare trusts established on behalf of a child are tax-efficient too. The beneficiary, who in this case would be the child, is deemed as the ultimate owner of the trust assets and taxed as if they owned them directly. 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 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 taxpayer.
Can we help you plan for rising school fees?
Our financial planners can help you answer any questions you have about planning to pay for a child’s education and put in place the necessary arrangements to help cover the costs. To find out more, please get in touch by emailing email@example.com or calling 020 7189 2400.
Advice in relation to trusts and Inheritance Tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.
*Source: Independent Schools Council Annual Census 2019
** If they attend an independent day school from nursery at age three, followed by prep school and then board at senior school from age 11-18. This figure assumes an annual average school fee inflation rate of 3.7%
This article was previously published on Tilney prior to the launch of Evelyn Partners.