Planning ahead for school fees

Every parent and grandparent wants to ensure that their child or grandchild receives a head start in life.

When it comes to planning for private education fees there are no pre-funded investment solutions in the marketplace at present. This can present financial challenges for parents and grandparents alike who have a desire to educate their children/grandchildren privately.

Some may consider paying school fees when the time is right from income. However, this can be challenging and unsustainable. The past year has taught us that income is rarely a guaranteed asset.

The key lies in planning ahead, by carefully structuring capital and/or income now to meet those fees in the future. Planning for education costs is underpinned by the same investment principles that would govern any life planning strategy, albeit with a primary objective in mind.

Simply optimising tax efficiency, targeting suitable levels of investment risk and keeping the plan under review can make the difference. Balancing these core principles with liquidity and accessibility will ensure that school fees can be met when the time is right.

One of the most powerful investment tools is time. The earlier a plan is put in place the better, as valuable investment compounding and capital growth over time can really add up.

If private schooling is no longer required, then funds can be used in other valuable ways such as assistance with property deposits further down the line. Whichever direction life takes, it is prudent to plan ahead for your child/grandchild’s future now. Keeping your plan on track is often as important as the foundations of the plan itself.

We can help you to structure your savings in order to meet your objectives. In doing so, not only will this benefit your children/grandchildren, but may also bring tax benefits for you as an individual.

Grandparents who wish to help with the cost of educating their grandchildren can do so with the added advantage of reducing their potential liability to inheritance tax (IHT) on death.

An outright gift of capital to a son or daughter to fund a grandchild’s education may be an effective tool for IHT planning but may not be attractive to a grandparent who wishes to retain some control over how the money is used.  This may be achieved by gifting capital into a trust for the benefit of grandchildren of which the grandparents are trustees.  A trust allows for flexibility and control with the trustees able to direct how the trust funds should be used taking into account the fact that different grandchildren may have differing needs and require different levels of support throughout their education.

Each grandparent may currently gift into trust the amount of their available nil rate band (currently £325,000) without a lifetime charge to IHT arising and if they survive seven years after the date of gift there will be no charge to IHT on death. Payments made for school fees will be treated as distributions to the grandchildren and some or all of the income tax paid by the trustees may be claimed back using the grandchild’s personal allowance.

In addition to, or as an alternative to a gift of capital, a grandparent can also use “surplus income” to fund school fees without any implications for IHT. Provided certain conditions are satisfied income used in this way will not be charged to IHT on the grandparent’s death. This is the case even if fees are paid within the period commencing seven years before death.

Surplus income is any income which remains after the grandparent has met all of his outgoings. If the grandparent regularly has income left over which is surplus to their needs this may be used to pay the school fees. Payments may made be made directly to the school or could be used to fund a grandchildren’s trust. To fall within the IHT exemption there are three conditions which must be met:

• The gifts must be made out of income
• The gifts must form part of ‘normal expenditure’ and must be paid out on a regular basis e.g. termly fees
• The payments should not have any impact on the grandparent’s standard of living

Records must be kept of both income and outgoings to show that gifts are indeed being made out of income and not capital and that there is a pattern of gifting.

For more information please contact Alison Pryde, Director in our Private Client Team, or Benjamin Mitchell, Chartered Financial Planner at our financial planning business Anderson Strathern Asset Management.

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