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  • School Fee Plan & Other Funding Options

    7 October 2017

    Angela Wood

    Private education is a substantial financial commitment. Planning ahead and taking a tax efficient approach to a school fee plan can make the outlay more manageable or at the least, less of a drain on your capital.

    With increases in school fees outpacing wages and inflation, regardless to the extent to which these outgoings might impact your lifestyle or cashflow, it generally makes sense to consider how you can most efficiently fund school fees.

    It pays to plan for school fees

    Technically, there are no specific tax breaks for the payment of education fees the within the UK tax code.

    Instead, there are a number of investment and savings options available which parents should consider to help achieve the objective of funding private school fees while minimising the burden on finances. The earlier you start your planning, the more options will be available to you.

    What is a school fee plan?

    School fee plans offer options intended to help build the funds for private school fees, or other expenses such as university education.

    There are usually three main types of school fee plan: capital schemes (lump sum investment); income or regular savings schemes (monthly/annual payments); and combined schemes (top up lump sum with payments).

    There are however a number of risks to take into account before committing to a school fee plan.

    Different plans will offer varying returns and degrees of protection. Under a school fee plan there is typically no guarantee of the final financial return, and there may be a risk of getting back less than you put in – which may not be enough to cover the actual fees.

    There are also likely to be initial costs and annual charges which you should ascertain before signing up.

    You should also enquire about fees, penalties and tax implications of cashing in your plan early. This may tip the balance in favour of other investment options available to you.

    What other funding options are available?

    Income

    Many parents fund school fees through income, but often as a default option. At current levels, high-rate taxpayers need over £23,000 a year before tax in earnings to fund the £14,000 average school fee level.

    This approach can have wider implications on tax efficiency and cash flow, particularly given the extended period of time concerned. It is usually prudent for parents to consider alternative options wherever possible.

    Gifts

    Where grandparents are looking to contribute to school fees, it makes sense to take advantage of the £3,000 per year annual gift exemption. The funds can be gifted into savings accounts, trusts, child trust funds and Junior Isas.

    Trusts

    There are a number of ways trusts can be used to help with funding school fees.

    One such example is a family business trust. This is an interest in possession trust that allows grandparents to contribute to ‘family benefit’ costs such as school fees without Inheritance tax implications. This approach uses the child’s annual tax-free personal allowance, meaning there will be no tax to pay on the dividends from the business.

    The important point to note here is that, for optimum tax efficiency, the trust should be established, say, by the grandparents or siblings of the parents, as if the trust is set up by parents then the income of the trust would be attributed to the parents where it exceeded £100 per annum.

    Pension

    Under the new pension freedom rules, at the age of 55 parents are able to take up to 25% of their pension pot as a lump sum payment, tax-free.

    You don’t need to be retiring to do this.

    The lump sum can then be used to fund school or, perhaps more commonly in this context, university fees. Alternatively, such a lump sum could be used to acquire a property in which the child lives as a student. In other words, financed by the Bank of Mum and Dad.

    The additional benefit of this approach is that the initial pension contribution also enjoyed tax relief.

    Mortgage

    Where you have built up enough equity in your home, you may be able to leverage this via an offset mortgage to fund school fees. This works by offsetting your savings against your home loan until you need to make use of them.

    Another option could be to remortgage, if rates suit and provided you have at least 25 per cent equity. And if you take your 25% pension lump sum at 55 as above, you can use this to pay off the outstanding mortgage.

    Advanced payment schemes

    Advanced Payment Schemes are typically offered by the school your children will be attending.

    If you have access to all or the majority of the funds required for school fees, and you are a higher rate taxpayer, you may want to look at an advanced payment scheme.

    Under an APS, parents pay the school fees upfront, as a lump sum. The school then invests the money in a high interest account.

    Had the parents invested the money themselves, they will of course have incurred tax on any interest earned. Because a private school might hold charitable status then the return on the account might be tax-free. The school may then ‘share’ this bonanza with the parents in the form of discounted school fees.

    ISA allowance & long term savings

    Early planning could enable you to make use of your personal ISA allowance specifically for school fees. Under your equity ISA allowance you can save up to £11,280 a year (per parent).

    Other longer-term savings products are available such as flexible savings plans, which usually invest in stock market funds. These can be attractive to some parents who want to retain the ability to access funds without penalty.

    When considering whether to invest in an ISA or any other financial products we would recommend you speak to an Independent Financial Adviser.

    Investments

    There are a number of investment options which parents could consider. Suitability will depend on a number of factors, including the time you have available, level of funds, appetite for risk.

    If you are starting early and school fees payments are years away yet, one of the investment options could be the stock market.

    Venture capital trusts offer a riskier investment option, but the returns are often attractive for contributing to the pool of funds for school fees.

    Equity Income Funds focus on shares with good yields for steady return, and in some instances enable you to retain the investments and pay some of the fees out of income in the future.

    When considering whether to invest in an ISA or any other financial products we would recommend you speak to an Independent Financial Adviser.

    Enterprise Tax Consultants can help with private school fee planning

    Your approach to school fees planning will depend on your individual financial circumstances, the availability of funds, and your wider personal goals. It may be the case that you can take advantage of a combination of funding options for maximum financial benefit through careful tax planning.

    Our services include:

    We can advise on taking a tax-efficient approach to a school fee plan, to help make what is a substantial outlay more manageable.

    Please note that we are not authorised to give regulated financial advice. As such, any advice in this area will be restricted to the tax affects of any transactions. If you need financial advice then you should seek out an independent financial adviser.