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Private education: the greatest legacy of all

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Chartered Financial Planner, Mark Chandler, from Ellis Bates talks to Elle Bylo about school fees funding, the costly challenges parents face and how these could be dealt with.

Q1. Mark, what is the current situation with school fees?

So, the issue is that parents who have not secured their first choice of state school for their children, or are worried that local schools are not up to scratch, often feel they have little choice but to send their children to private schools; even if that means pushing themselves to the limit financially or getting into debt.

Q2. Private schooling can be very costly, how much are we looking at?

As a rule of thumb a private education will cost from £15,000 per year for a day pupil. Those who wish to board will see that cost increase by upwards of £12,000 per year.

Q3. Who will be paying for the cost of this?

Rather than parents turning to debt, those who are often in a better position to assist with the financial burden are grandparents.

School fees can represent a good opportunity for grandparents to engage in Inheritance Tax Planning. Contributing to school fees either from income or within annual allowance, will reduce the proportion of grandparents’ estates that are potentially subject to 40% inheritance tax.

Grandparents can give up to £3,000 per year from capital free of inheritance tax and if they also make regular school fee payments from their income, these will immediately be removed from their inheritance tax liability, provided the gift comes from surplus income and does not reduce their standard of living.

If they make school fee payments as gifts from their capital in excess of the £3,000 per year, these would be regarded as a ‘potentially exempt transfer’ (PET) and would be free from inheritance tax after seven years.

Q4. If you are going to struggle financially, are there any other ways to gain school fees funding?

Occasionally, grandparents have the financial ability to offer a lump sum gift, if this is the case then setting up a trust for paying school fees might be a consideration as there are substantial tax benefits.

A trust allows people to ‘gift’ money to their chosen beneficiaries, e.g. grandchildren for their education, but still retain some control.

If grandparents set up a trust to pay school fees, they can individually give up to £325,000 or £650,000 as a couple, under a ‘nil rate band’.  This means that they will not be subject to an immediate tax bill, and providing the grandparents are still alive in seven years’ time, the money will not be included in their estate for inheritance tax.

Trusts can also be helpful if there are difficulties between a child’s parents.  Sadly, with divorce rates on the rise, a child’s education could be jeopardised if there is a marital dispute unless the money for school fees has already been gifted unconditionally or ring-fenced.  A trust offers a formal and straightforward way to keep that money safe.

Q5. Can people use investments to fund school fees?

If children are a few years off school entry, using a NISA allowance (New Individual Savings Account) to save up to £20,000 a year per person towards school fees is a tax efficient solution.

Q6. What are the best next steps to take?

The best thing to do first is to seek Independent Financial Advice. Whilst the objective of funding for education remains simple, great care should be taken to ensure that the planning is robust, sufficient and tax wise. Professional advice should be taken at every step of the way.

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