Private school education can be considered an investment in your child’s future, creating the personal skills and knowledge and confidence that will help them succeed in life. But with the average school fees now £4,765 a term, between the age of 5 and 18 it will cost you more than £180,000 per child.
According to these figures, from a survey by Lloyds Bank Private Banking, many parents are struggling, and even thinking about taking their children out of private school because of the costs.
We look at how you can make the costs a little easier to bear.
Trust in the family
If you are paying £15,000 school fees each year, and are a high rate tax payer (and so paying tax at 40%) you would need to earn £25,000 simply to cover them.
The first thought many people have is to invest in income-generating assets which might pay the fees. Unfortunately, income generated from assets passed from parent to child is taxed as though the income was generated by the parent.
If there was some way to prevent the taxman taking a share of the cash you want to invest in your children’s future, paying for a private education would be a great deal easier.
Fortunately, it may be possible to do exactly that with a Family Trust.
As the name suggests, you’ll need the help of your extended family. You can’t gift the sums to your children without incurring tax. This rule is so parents don’t take advantage of a child’s tax status for their own gain.
But grandparents are a different matter. By getting grandparents to gift assets into a Family Trust, the income generated by the assets can be passed onto the children without it affecting your tax position.
So, your children can enjoy the benefits of a private education, but the taxman might enjoy a far smaller share of the money put towards paying for it.
What exactly is a Trust?
A trust is simply a way of passing the benefit of assets to other people without them taking possession of the funds themselves. The Trustees, which could be the grandparents, retain control of the capital, and can manage the investments as they choose. The income from those investments will go to whoever is specified in the trust, which in the case of a family trust means it will benefit the next generation, or generations if the trust is successful enough.
The benefits don’t stop there. As well as tax advantages, a trust can help protect the assets that have been paid into the trust fund against difficult situations in the future. Divorce or bankruptcy of one of the beneficiaries is unlikely when they are still at school or even university, but the Trust could still be paying out for them when they are discovering the twists and turns of adult life.
How trusts reduce tax
The tax liability of trusts is complicated, and will depend on exactly how the trust is arranged. It is possible to set the trust up so that the income accumulates and then goes to pay the school fees each term.
There would be a tax in the trust and the child – or the patents on their behalf – would need to do a tax return to reclaim the tax paid. But although there is still likely to be some tax to pay and some paperwork to deal with, the chance of making school fees more affordable is likely to make setting up a trust worthwhile for many families.
There are advantages for Inheritance Tax (IHT) too. Each person can give away up to £325,000 of assets without IHT liabilities, if they have not made significant gifts in the previous seven years. A couple could place £650,000 into the trust.
Setting up a family trust
Trusts can be a very flexible tool, and can be set up to suit your, or rather your children’s needs.
So, for example, you could instruct that income must be split between all your children equally, regardless of their circumstances. You could specify that it must be used for school fees. Or you could leave it to the Trustees to decide annually who receives what.
There are also different types of trusts. Discretionary and Bare Trusts have different rules, tax inabilities and reporting needs. The range of choices available mean that it is essential to call on a professional to draw up your trust.
To find out more about Family Trusts, or other ways to reduce the cost of paying for school fees, please contact our specialist team at Continuum.
The Financial Conduct Authority does not regulate tax and trust advice.
Levels, basis and rates of tax are subject to change and depend upon your individual circumstances.
The Financial Times Online – £180,000 — 13 years of London private school fees – September 2nd 2016
Lloyds Banking Group – The cost of private education soars to £157,000 – August 28th 2016