Back to school brings back memories of those proud moments when our children start a new school. A good education remains one of the most valuable gifts we can give our loved ones. Finding the right education can be difficult and whilst finding the best state school is often a postal lottery, private education costs are high and rising fast. The average boarding fee in 2011 was £8,384 per term, increasing at 6.5% per annum over the past 10years. In addition, with many universities charging £9,000 tuition fees per year, many graduates face debt of up to £53,400 at the end of a 3-year course.
For parents, the secret to school fee planning is often to plan early and to have a clear strategy mapped out, often with a monthly or annual savings plan providing the right solution. Allowing for price increases ahead of inflation is wise and there is a need to stick to the plan unless absolutely essential. Parents saving for school fees need to be aware that income on investments for children in excess of £100 per annum is taxed as their income and therefore careful planning needs to be adopted to avoid these punitive tax liabilities.
Parents however, are finding it more and more difficult to meet these rising costs and are often turning to grand-parents to find ways of helping with this financial conundrum. One interesting way of potentially reducing the impact of education funding is for grand-parents to consider making gifts into a suitable trust. Dependent upon the type of trust and the size of the gift, it will be classed as a lifetime transfer for Inheritance Tax purposes. Generally, so long as the individual making the gift cannot benefit from the gift in the future, the value of this will pass out of the estate for calculating Inheritance Tax after 7years.
For those with estates in excess of the lifetime allowance of £325,000, the tax savings on death on such a gift would be 40%. If we look at it from the point of view of the parents, who would normally expect to be the beneficiary of the grand-parents estate, the future cost to them of a gift of an amount equivalent to the £53,400 debt at the end of the 3year course, could be as little as £32,040. For the grand-parents looking for a suitable way of mitigating future Inheritance Tax, it can be a very rewarding opportunity.
Gifts do not need to be lump sums and for grand-parents with significant surplus income in retirement, saving regularly for future school fees may provide an alternate option. Gifts made out of normal income are exempt from Inheritance Tax, subject to certain constraints and therefore fall immediately outside the estate. Care needs to be taken with the definition of “normal income”, but this can be a valuable opportunity.
Selecting the most appropriate investment strategy is also essential in order to get the best out of the money saved. This includes assessing the time horizon of the investment and the assets that will best achieve the required outcome.
Planning for school or university fees is a complex matter and there is no single right way. Effective solutions need to be designed in line with the family’s requirements and circumstances. Adopting the right type of trust structure to suit the age and the objectives of the participants is essential and ensuring that the outcome is secure for both the donor and the beneficiary is always a challenge if the investment solution is to be as tax efficient as possible.
The content of this article is generic and should not be construed as specific investment advice. Please contact us before proceeding with any course of action.