- Financial planning
- 4 minute read
We all want the best for our children, and for many parents, this means paying for a private school education. With research showing that independent school students in the UK outperform national and global averages academically and that over 50% of students continue on to a Russell Group university, a private school education is often seen as an investment in a child’s future.
Yet the privilege of attending an independent school comes at a cost. According to the Independent Schools Council (ISC) 2019 Census and Annual Report, the average fee per term for a private day school in the UK is now £4,7631, which equates to over £14,000 per year. And worryingly, independent school fees continue to rise faster than inflation – between 2010 and 2019; fees increased 3.9% per year on average2.
What this means is that parents who plan to send their children to a private school need to start the financial planning process early. By planning ahead, parents can prepare for the expense and build up a sizeable savings pot in advance. With that in mind, we have put together this school fees planning guide that covers several financial strategies that parents can use to save, invest, and pay for school fees tax-efficiently.
School fees planning: the first steps
One of the first things to do when planning for school fees is to establish a regular savings plan. The earlier you put a savings plan in place, the more time you’ll have to build up a savings pot. Early on in the planning process, it’s also sensible to give some thought towards the most appropriate asset allocation for your school fees savings. This will depend on a few factors, including your investment time horizon and your risk tolerance. If unsure about the best asset mix for your financial goals, it’s a good idea to speak to a financial adviser.
Saving for school fees in advance: an example
Consider the example of a couple who plan to send their child, who is currently aged three, to a private secondary school in the UK.
Assuming that private school fees continue to rise by 3.9% per year, by the time the child is ready to start secondary school at age eleven, fees for a private day school could amount to around £19,400 per year, which equates to a payment of approximately £1,620 per month. That could represent a significant proportion of the family’s monthly income.
By starting a savings plan now, however, the financial burden could be reduced considerably. If the couple was to save £10,000 per year and they were able to generate a return of six percent per year on average on their savings, they could potentially amass a savings pot of around £100,000 by the time the child was ready to start secondary school. This would undoubtedly make paying for private school fees a great deal easier.
Using ISAs to invest tax-efficiently
As well as establishing a regular savings plan and considering your asset allocation, it’s also important to ensure that you’re saving for school fees in a tax-efficient manner.
One straightforward way to save for school fees tax-efficiently is to invest within a Stocks & Shares ISA (Individual Savings Account). This ISA allows you to invest in a broad range of assets, and all capital gains and income are tax-free. You can also withdraw your savings at any time, penalty-free. Currently, each adult in the UK has an annual ISA allowance of £20,000 per year, which means that a couple could potentially put away up to £40,000 per year for school fees in Stocks & Shares ISAs completely tax-free.
Parents could also consider saving into a Junior ISA, however, this strategy is more suited to saving for university fees, as funds within a Junior ISA cannot be accessed until the child turns 18. Currently, the annual allowance for this ISA is £9,000. Parents should be aware though that any money placed within a Junior ISA belongs to the child.
Strategies involving grandparents
Gifts from grandparents can also be a tax-efficient way of paying for school fees. Provided the gifts are under the annual £3,000 ‘gift allowance’ per grandparent, there will be no Inheritance Tax (IHT) liabilities. More substantial sums can also potentially be gifted free from IHT as long as the grandparent survives for seven years after making the gift.
Grandparents could also consider taking advantage of the IHT exemption that is available for people with income that is surplus to their needs. If conditions for the exemption are met, gifts will be exempt from IHT as soon as they are made. IHT is a complex area, however, so grandparents should seek advice on tax planning from a specialist before making gifts for school fees.
Another effective strategy involving grandparents that could be worth considering is setting up a bare trust. This is a simple, binding legal arrangement that is relatively straightforward to organise with the help of a financial adviser. In a bare trust, assets are held by a trustee (the grandparent) for the benefit of the beneficiary (the grandchild). The assets are taxed as if they belong to the grandchild, meaning that the grandparents can take advantage of the grandchild’s personal tax allowance. The allowance is £12,500 in 2020-21.
Bare trusts can also be quite effective from an IHT perspective for school fees planning. If the grandparent remains alive for seven years after contributing to the trust, no IHT liability will be due. Parents and grandparents should be aware, however, that when the child turns 18 (or 16 in Scotland), he or she has the right to take control of the money within the trust.
To find out more, or if you have any questions regarding school fees planning or financial planning, don’t hesitate to request a callback.
Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up, and you may get back less than you invested. This article is not intended to be an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation .