School Fees Planning
Are you taking a tax-efficient approach to school fees planning?
Should you opt for private education for your child or children, payment of school fees will become a substantial commitment for many years to come – requiring careful financial school fees planning.
Private school fees continue to outpace wider inflation. Average school fees are now more than £14,000 per year, with boarding fees almost double this. The numbers build quickly into considerable sums over the course of a child’s education.
Even where payment of schools fees is unlikely to impact your lifestyle or act as a financial burden, you can take steps that will bring wider wealth management benefits for you and your family.
A structured approach to school fees planning can offer you reduced tax liabilities.
If you are the owner of a family business, you may be able to make use of a family business trust for payment of family expenses – such as school fees.
Under a family business trust, the profits of the company can be used tax-efficiently to pay school fees or similar expenses by allowing the use of the children’s personal allowances and lower tax bands. An attractive solution where parents own the shares in the family business and grandparents want to assist the parents in paying school fees.
Here to help
As specialist tax consultants, we are experienced in devising and creating tax-favourable structures including family trusts which allow for school fees planning and other maintenance costs for children to be paid out of untaxed income.
We can advise on the most sustainable, tax-efficient approach to funding private education, based on your existing circumstances, with a plan that is both adaptable to change and provides considerable tax relief through payment of school fees.
Family trusts are part of our wider tax advisory service for families, individuals and businesses, aimed at preserving, protecting and providing longevity to wealth.
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What are the most common options for school fees planning?
Parents can opt to fund school fees in a number of ways. Individual schools may also offer payment plans and options which may be worth considering for your circumstances.
Typically, the most common approaches to paying private school fees include:
As a high-rate taxpayer, you would need over £23,000 a year in earnings, taxable at 40%, to meet the £14,000 average fee level.
If you are a business owner, taking school fees directly as dividends would incur income tax at 32.5%, in addition to tax on profits.
Purchase income-generating assets for children
Income generated from assets being passed from parent to child comes under the same tax treatment as income generated by the parent – i.e. at the higher rate.
Grandparents gift assets into a bare trust for grandchildren
Under this type of trust, grandparents are trustees and decide how their money is invested.
Income generated by these assets may be passed onto the children without any affect or dependency on the parents’ tax position.
The child is the beneficial owner of the assets and takes ownership at age 18, or 16 if they live in Scotland. Until then, the trustees can withdraw money for the benefit of the child to pay for school fees.
There are Inheritance Tax (“IHT”) implications of gifting money for school fees. Each person is entitled to give away up to £3,000 a year free from IHT. There is also the right to carry over any unused annual exemption from a previous year into the next. However carried-over exemptions expire if they are not used from one year into the next.
There will also be no tax to pay on income providing the gift falls within the child’s allowances. Most children can earn income plus including interest up to £17,000 a year without paying tax. This includes their £11,000 Personal Allowance (income tax), £1,000 Personal Savings Allowance and £5,000 Dividend Allowance. Note however the dividend allowance is being cut to £2,000 from April 2018.
How do family business trusts work?
By way of example, the share capital of a family business is split into, say, A and B shares.
The rights of the attached to each class of share might be generally the same. However, it is usually the case that the B shares only participate in the future growth of the company and not in the capital value accrued to the current date.
The B shares still retain voting rights and dividends.
The B shares (or a proportion of) are gifted to the grandparents irrevocably.
This is an unfettered gift. It will be an event for Capital Gains Tax (CGT) purposes. However, it should be the case that the value of these shares is reduced by the rights attributed above.
It is also a transfer of value for Inheritance Tax (IHT) purposes although, again, the value will be negligible so an IHT charge should not be an issue.
Subsequently, further down the line, the grandparents might then, independently, decide to gift the shares thereafter to a new family trust for their grandchildren.
Again, this would be an event for CGT purposes and IHT purposes, and it is expected that the value of such shares should be negligible and therefore no immediate tax consequences should result.
The directors of the company, in the course of deciding whether to pay a dividend to all shareholders, might vote a dividend on the B shares.
The terms of the trust should allow the children to utilise their personal allowances and lower tax rates as opposed to the higher rates suffered by the parents.
There would be nothing to prevent the trustees can use the funds to satisfy school fees and other costs. As such, the parents having to take a dividend from the company for the same purpose out of income taxed at a higher rate.
Going forward, the shares in the trust should be qualify for Business Property Relief, protecting the value from the ten-year charge and any exit charge on a capital distribution.
School fees planning related content
School Fee Plan & Other Funding Options
Private education is a substantial financial commitment. Planning ahead and taking a tax efficient approach to a school fee plan can make the outlay more manageable or at the least, less of a drain on your capital.
SCHOOL FEES PLANNING
Essential information about school fees planning.
Placing your children in private schools can be a substantial commitment for many years. With the average school fees now being more than £14k per annum these sums can be considerable over the course of a child’s schooling.
Even for Ultra High Net Worth Individuals where school fees are unlikely to be a financial burden, steps can be taken to bring wealth management benefits.