With the right financial advice, foresight and planning, parents and grandparents can beat the rising cost of school fees

Calls from politicians to strip private schools of their charitable status have put fees firmly in the spotlight. More children than ever are entering private education but removing this tax break and enforcing independent schools to pay VAT, will likely trigger much higher fees.

The latest figures from the Independent Schools Council show that the average term fee stands at £5,218, or £15,655 a year. Given that most children spend 14 years at school from reception through to the upper sixth year, it (already) adds up to parents and grandparents paying hundreds of thousands of pounds in school fees by the time their children and grandchildren pick up their ‘A’ Level results. And that’s not all. Fees don’t typically include extras such as uniforms, sports activities, breakfast clubs, school trips and music lessons – they can easily add another 5-10 per cent to an annual bill.

Working out how to pay fees is often left by many parents until they begin actively looking at schools – although the earlier you start planning, the better. Getting ahead by saving or investing as soon as possible can help you reduce the burden of fees, but you’ll need to invest sizable sums to make it worthwhile.

To give you an idea of how much you’ll need to save, investing £1,666 per month (the current Isa allowance of £20,000 over 12 months) before charges in the five years before your child starts school could generate a pot worth around £109,920 assuming growth of 5 per cent a year. Start investing seven years before the first school invoice arrives and that could generate a pot worth £159,875 based on a 5 percent annual return.

Given the huge sums involved in paying school fees, we find that grandparents are increasingly looking to help. It can be a financially intuitive move as well as a generous one. Grandparents have several options, which can also help mitigate potential inheritance tax (IHT) liabilities too. Here are three of them:

1. Make a tax-free gift

Anyone can gift £3,000 each year free of any inheritance tax, which on its own, £3,000 doesn’t seem that much compared to the total bill. However, if there are four grandparents then £12,000 a year could make a significant difference. You can gift more than £3,000 per year, but this could expose the donor to an IHT liability as it could be a ‘potentially exempt transfer’ (PET) and the excess is subject to the infamous seven-year rule. A gift of unlimited value only becomes exempt from IHT so long as the donor lives for seven years after gifting, otherwise, it will be considered part of their estate for IHT purposes.

2. Use a trust

Discretionary trusts are frequently set up by grandparents to pay school fees, as a trust can reduce a potential IHT liability. Under current rules, you will have to pay IHT of 40 per cent on the surplus of your assets exceeding £325,000 (the nil rate band allowance threshold). Grandparents can put the amount of their available nil rate band into the trust without triggering an IHT charge, as long as they are not the trust’s beneficiaries. Using two grandparents’ nil rate bands means that £650,000 can potentially be used to pay fees, while at the same time significantly reducing a potential IHT liability. Trusts can be complex arrangements at the best of times, so getting expert financial guidance is essential.

3. Pay as you go

Paying as you go out of your salary is not the most tax-efficient option for parents but grandparents might be in a position to reduce their IHT liability by using “normal expenditure out of income”. However, there are strict rules. Payments must be made at regular intervals and they must prove that the payments to the school are coming from their income; that they are maintaining their standard of living; and that they aren’t having to dip into their savings simply to pay fees.

Get expert help

Paying for private school fees can seem like a mountain to climb but you do have options. As ever, a strong long-term financial plan coupled with tax-efficient strategies will help – although, the route you take will depend on your circumstances and long-term objectives. Seeking expert financial advice is vital. A specialist adviser will understand the nuances and complexities of the options available so you can focus on your children’s education rather than the end-of-term bill.

To discuss any of the issues raised in this article, please contact your adviser, or call us directly on 0161 819 1131. Further information can also be found at gov.uk.

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

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