School Fees Finance
Cash ISAs, Stocks and Shares ISAs, Unit Trust, Open Ended Investment Contracts (OEICs) and Societe d’Investissement A Capital Variable (SICAVs). Tese are all investment schemes that pool together investors’ money. Tey usually invest in shares, property or fixed-interest type investments. Other possibilities are Investment Trusts, Pensions and Save as you can scheme (SAYE). Te benefit of an ISA over other savings plans is that it’s tax free. Te amount that should be saved will be dependent on the lump sum needed in the future and when. Tere are also annual limits on the amounts you can save so you may need to rely on an additional form of funding as well. Do remember to
Before
you rush off to
keep reviewing a regular savings plan to make sure it is on target to meet your requirements and keep an eye on the rising costs of inflation so that you do not suddenly find that your initial goal is no longer sufficient. Your child can help too. A child is entitled to personal tax allowances and reliefs from birth. For the tax year 2010/11, the first £6,475 of a child’s income and £10,100 of capital gains (up to an income limit of £100,000) are tax free. A word of warning though - if the assets originate from the child’s parents then the majority of the income is taxed as if it were the parent’s income. It is usually more tax efficient, therefore, for the child to receive any significant gifts of capital from grandparents or relatives and friends. With larger sums, an alternative to setting up a bank account would be to create a “bare trust” for a child with the capital invested in a bank account, with the parents as trustees, with control over how much the child receives. Te drawback is that the child must be paid the capital when they turn 18. Should you receive a lump sum of money, think before you use it to pay off the mortgage. As long as it’s not needed for two years, it could be invested. Just make sure the returns exceed inflation rates. National Savings and Investments offer savings protection by the Treasury. It was announced in the 2011 Budget that Index Linked Certificates were being reintroduced, which is an ideal investment for cash pending it being spent on education (within a 3-to-5 year period). Investments such as stocks and shares ISAs, unit trusts, OEICs, SICAVs and pensions may be suitable for your plan. Pension plans offer higher-rate tax payers
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repay the mortgage, consider putting some money aside to fund education
the opportunity of receiving up to 50% tax relief on contributions of up to £50,000 per annum. Tis means that by investing £35,000 into a pension, you receive £15,000 reduction in your annual tax bill. Once you reach 55, you can draw 25% of the value of the pension pot, tax free. From April 2011, individuals are able to draw down any level of income from their pensions provided that they meet certain criteria and the entire pot could be cashed in at once to help fund the costs. If a parent wishes to pass larger sums of money to their child during their lifetime or make provisions in their will for their children, then a “proper” trust rather than a bare trust may be the answer. Trusts allow assets to be passed to the next generation with trustees controlling the child’s access to capital and
income streams. A specific trust can be set up to fund education costs.
Income tax rules mean that if parents are settling assets on trust for their children then it may be best if funds are invested for capital as opposed to income growth, while the children are minors. Tis is not a problem for gifts by grandparents, who have a golden opportunity here to help fund school and university fees. If the amount they give is less than the nil rate band (currently £325,000) or the gifts fall within certain inheritance tax (IHT) reliefs or exemptions, setting up a grandchildren’s trust can be a key part of an individual’s lifetime IHT planning, as well. For non savers, there is always the option
of taking out a mortgage whether it’s on your own home or better still, of purchasing a buy-to-let property, benefitting from the rent and the capital investment. By doing so, this becomes a tax-efficient investment and enables any debts to be secured against a property other than a family home. Grandparents are also usually more than prepared to amend their will and to gift money to fund education while they are still alive rather than waiting to give the money once they have died. Tis way, less IHT is paid and so ultimately more is given, and more received. Today, scholarships tend to be more of
a recognition of talent than a support for families, rarely being worth more than 10%. Bursaries, however, can cover all or part of the fees of children who satisfy the school’s entry requirements but whose parents are unable to pay the fees. Most schools require that fees are paid termly but can be accommodating allowing monthly payments. Many private schools also offer the opportunity to pay fees in advance schemes at a discounted rate. You pay at the current rate, in advance, and the school invests the sum on your behalf. Te school can generally earn interest tax free because of its charitable status which is passed back to parents through higher returns. Tis is especially useful where you have received a lump sum, either from an annual bonus, redundancy, sale of business or an inheritance. Do also remember, when looking around, that schools do sometimes discount on siblings, so don’t be afraid to ask. It is possibly the best investment you will ever make.
Helen Howcroft is an Independent Financial Adviser and Director of Equanimity IFA Limited. Helen Matthews is a Solicitor with Bircham Dyson Bell LLP.
Summer 2011 FirstEleven 49
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