Business
School Fees
Post-holiday Homework With memories of the summer holidays
probably long gone, the minds of many parents will now be fixed on paying the new school fees. Private education can be a major cost for parents – and school fees are increasing faster than the rate of inflation. Figures from the Independent Schools Council show that school fees rose by 3.9% last year. Te average term fee for private education is £4,765, with the average day-school fee at £4,051. Some estimates suggest it will cost as much as £200,000* to put one child through private school, which is why it makes sense for parents to start planning sooner, rather than later.
Consider the impact of inflation Many people choose to pay school fees as
they arise from taxed income. Some schools will allow you to pay fees for several years in advance, fixed at today’s prices. Paying fees this way can help you avoid fee increases in later years. It is particularly beneficial if you have funds available, or you can free up cash by releasing some equity from a property or by releasing tax- free cash from your pension, for example. If you prefer to retain the funds with a view to paying school fees over a period of time, it is vital to take account of inflation. Inflation running at 2% would erode £100,000 to £66,671 in real terms over 20 years. At 4%, the real value would drop to £44,200, while at 5%, the original £100,000 would be worth just £35,849 after 20 years. Saving for school fees is a long-term
commitment and it is essential to have an investment strategy in place to help you meet your objectives. One option is to earmark funds for this purpose and hold them in a trust. Te trust route is also often used by many grandparents who are keen to help out financially, while it can also reduce their Inheritance Tax (IHT) liability.
Save at your discretion A discretionary trust provides IHT benefits, but is also a flexible way to save for grandchildren. Tese trusts are flexible because there is a class of beneficiaries who may potentially benefit from the trust’s funds (for example, grandchildren) – no individual has a right to the funds. Tis means that the trustees can have full discretion as to which of the beneficiaries can benefit and how they will benefit. Funds can be drawn upon to pay school fees or other education-related expenses. Tey can also extend to paying university fees at the trustees’ discretion. It is generally recommended to transfer assets into a discretionary trust up to the available nil rate band for IHT purposes – this is the amount that is charged to 0% for IHT and is currently £325,000. However, it is important to seek specific advice on whether such a trust is appropriate for your circumstances and how much money you should transfer into it. Provided the donors survive seven years from the date of the transfer of funds into the trust, the gift usually falls outside of their estate for IHT. Over a seven-year period grandparents
could potentially remove combined assets of up to £650,000 out of their estate for IHT purposes, leading to a potential tax saving of £260,000. Over a 14-year period these figures could increase to £1.3m and £520,000, respectively.
Income tax boost Income from a discretionary trust in these circumstances is treated as the grandchild’s own income for tax purposes. Tis means that there is an opportunity for the beneficiary to reclaim the income tax paid by the trustees. However, it is important to note that where the parent has established the trust and the children are minors (aged under 18) the income generated is taxed as if it were that of the parents. A discretionary trust is just one option, but it
is worth remembering that there is no magic school fees plan. It is a case of doing the maths and making sensible assumptions that are reviewed regularly to ensure that your strategy is making the grade.
* Wesleyan Assurance Society
For more information about becoming a Coutts client in the North West, contact Andrew Christie, Executive Director, Coutts in the North West, on
andrew.christie@
coutts.com or call 0151 471 8406.
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