- Financial planning
- 2 minute read
As the cost of private school fees mounts, grandparents are increasingly helping to foot the bill. They need to be mindful of inheritance tax, however, as well as family dynamics and meeting their own needs in retirement.
The average cost of fees for private day schools has climbed to £14,102 per year, according to the Independent Schools Council [1], with boarding school fees even higher. Average annual fees for day attendees at boarding school are £18,129 while fees for boarders are a hefty £32,259.
What’s more, to meet the £14,102 cost of day school fees alone, a basic rate (20%) taxpayer has to earn £17,627 in pre-tax income (ignoring National Insurance contributions), while the figure for a higher-rate taxpayer (40%) rises to £23,503.
Overall, the cost of school fees has jumped by 70% since 2004, and continues to rise rapidly, outpacing inflation. Since parents are already under pressure from high property prices, escalating living costs and stunted wage growth, it is not surprising that they are increasingly turning to the Bank of Gran and Granddad to help them out with the cost of school fees.
Of course, not every grandparent is able, or wants, to help out with school fees, but what are the options for those that do? And how can they do it in a tax-efficient way?
1. Take advantage of the ‘normal expenditure out of income’ exemption under the Inheritance Tax Act 1984
Grandparents who enjoy a good income, either from their pension, other investments or because they are still working, can pay out of their after-tax income for all or part of the school fees without incurring any inheritance tax. This is as long as they can prove that the payments are regular – for example, they could pay by direct debit – and they are not dipping into their savings to find the money.
2. Pay school fees in advance
Schools may offer discounts to grandparents who agree to fund their grandchild’s education in advance. While this approach can be tax-efficient, it does involve grandparents parting with a sizeable lump sum if they are paying for several years of school fees in advance. Consideration needs to be given to any potential inheritance tax implications that may arise if fees are paid from capital.
3. Set up a bare trust
A bare trust is a way to hold investments specifically for a named beneficiary or beneficiaries – in this case, grandchildren. They can be tax-efficient because any tax charges that fall due as a result of withdrawing money from the trust will fall on the grandchildren, who will probably be non-taxpayers since they are at school. Nevertheless, these payments will still take seven years to fall out of the donor’s estate for inheritance tax purposes. Since trusts can be complex, it is important to seek professional financial advice if you plan to use one.
4. Make gifts that are exempted from inheritance tax
Each grandparent is entitled to give up to £3,000 away each year, without that sum being added to the value of his or her estate for inheritance tax purposes. This means that a couple could give away £6,000 between them to help their children cover the cost of school fees. They can also make small gifts of up to £250 per person per year provided the individual that they are giving the money to has not already benefitted from another exemption. So they could give £250 to grandchildren to cover the cost of school trips or extra-curricular activities, for example.
Getting the balance right
It is not just tax that grandparents need to think about when they are planning to help pay for their grandchildren’s education. They also need to think about the broader implications of what they are doing. If they have lots of grandchildren, or are likely to get more in the future, will they be able to afford private school fees for all of them? What if some of their children do not have dependents – will they feel that they are losing out? Then there is the question of whether paying school fees is the best way of supporting their family. Instead, they could save money in Junior ISA accounts that their grandchildren can access on their 18th birthdays.
Furthermore, grandparents must make sure that they have sufficient capital and income to cover their own needs in retirement, especially as life expectancy is rising. It is important to get the right balance between having enough money to live comfortably for the rest of their lives and not leaving an estate that needlessly incurs a hefty inheritance bill. This is where a professional financial adviser can help.
The do’s and don’ts of paying for your grandchildren’s education
1. Do start early. The more time you allow yourself to plan for school fees, the better prepared you will be. For example, you could begin gifting money to your children as soon as grandchildren are born and ask them to set it aside with a view to covering school fees in future.
2. Don’t forget the wider tax-planning considerations around what you’re doing – particularly the implications for inheritance tax.
3. Do make sure that whatever financial commitment you’re planning to make with regard to school fees doesn’t compromise your own financial security.
4. Don’t neglect communication – it is important to talk to the wider family about your plans, particularly any children who may not have children of their own.
5. Do seek professional financial advice.
[1] http://www.telegraph.co.uk/investing/funds/five-ways-to-meet-the-156653-cost-of-private-school