School fees represent a significant cost (with latest figures averaging them upwards of £15,000 per year) to parents who opt to educate their children at fee-paying schools. With a number of independent schools in Cambridge alone, this is a real issue for many parents in our region. Regardless of the financial impact such fees have, the benefits of applying some forward-thinking school fees tax planning should not be underestimated. Employing some, or all, of the tactics outlined below can assist in reducing costs.
School fees tax planning options
Hailed as a tax-saving option for the wealthiest of parents, the ‘Fees in Advance’ scheme – essentially a collaboration between parents and schools – is a means by which participating parents can save thousands of pounds. As the name suggests, this involves parents making an advance lump sum payment to cover some, or all, of their children’s school fees. They are rewarded for doing so by receiving a discount on the fees. This is also an attractive proposition for the school as they invest this lump sum, safe in the knowledge that their charitable status affords them tax-free returns on the investment.
Grandparents can also provide a tax-efficient vehicle to help with the cost of school fees by gifting assets to be held in trust for the benefit of their grandchildren or by making gifts of cash directly to the schools. Initial capital gains tax planning needs to be taken on gifts by making sure where available that reliefs are taken. In respect of inheritance tax planning care needs to be taken as to the amount of the gift and how regularly it is being made. As children enjoy the same personal tax allowance of £10,600 and tax banding as adults, trust tax planning is still a popular way of paying for school fees.
Depending on the parent’s age, a further tax efficient way to cover the cost of school fees is to use the 25% tax free lump sum from their pension pot, available for withdrawal once they reach 55. In the case of those parents for whom aged 55 is too late, alternative solutions could be to take out a loan or increase their mortgage to cover school fees until they can withdraw from their pension pot in order to repay these debts.
As with any form of tax planning, it is always advisable to take a holistic view of the situation and tailor advice to suit individual circumstances. We are happy to offer advice and assistance – please do not hesitate to contact us.
As featured in Cambridge News Wealth Management Supplement, April 2015