For many parents the option to send their children to a fee paying school is not an option. However if you wish to consider sending them, what is the best way to save and how can these costs be reduced?
A Lloyds study puts the average annual cost of sending a child to Private school at £13,830 — up 21 per cent since 2012! Depending on when you start sending your child to private school, these costs can be met through income or from savings or both.
So how can you reduce the costs of paying for private school fees? Here are our top 8 tips:
1. Set up a family business
This is best done when the business is established. It involves Grandma and Grandad setting up a family business and then naming the children as shareholders. The private school fees are then paid by paying out dividends to the children. This is tax free for the children because so long as the children don’t have any other earnings or income, they can use their personal tax allowance. For this tax year that is £11,500 p.a.
The grandparents put income-generating assets in the family business, such as property or investments. It is also important that the grandparents create the business and not the parents. Parents cannot gift to children without incurring a tax charge. Otherwise it is seen as a gain for the benefits on you as the parent.
This is a great way of paying for private school fees if the grandparents would prefer to help the grandchild during their lifetime rather than leaving their wealth as an inheritance. However specialist tax advice would be required and there would be expenses to set the business up.
2. Don’t just use ISAs, start investing into an offshore investment bond
Most people are aware of the benefits of investing into ISAs. However many overlook the benefits of using offshore investment bonds to pay for school fees.
Many are out off by even the word “offshore” investing. Fear not, it is really just the tax wrapper that we are referring too and does not mean that you are investing into some dodgy tax avoidance scheme! Speak to a financial adviser who can help you with selecting a reputable and safe vehicle.
Grandparents can invest a lump sum into an investment bond, name themselves as the trustees and the children as the beneficiaries.
- The bond is then split into a number of policy segments (normally a few 100)
- Each individual policy segment would then be encashed to pay for the school fees each year/term
- The grandparents can invest over the years into an investment bond (a minimum of five years is needed for stock market investments)
- When the child reaches private school age, they can assign the policy segments to the child
- Assuming that the grandparent has invested wisely into the stock market and reviewed it regularly, any gain made on the bond is taxed on the CHILD and not the grandparent.
The grandparent can be in total control of the investment until they chose to assign it to the child. Long term investments can also benefit from stock-market related growth.
3. Take money from your pension
Under the new pension rules, at the age of 55, you can take 25% of your pension pot as a tax-free lump sum. This could be used to pay for the private school fees. If you are a higher or additional rate taxpayer, taking it as a lump sum is tax efficient as you will not have any additional tax to pay. You could leave the rest of the pension invested for your income in retirement.
It would important to seek financial advice in this instance. This may impact on your income in retirement and could affect the amount of money you could contribute to a pension.
4. Offer to pay the private school fees upfront
Some private schools offer the option to pay in advance as a lump sum, known as ‘advance funding.’ This could protect you from hefty inflation rises on fees in the future. Private school inflation rises are often far greater than your loaf of bread rises!
5. Start financial planning right now!
Ideally, financial planning for private school fees starts from day dot. A combination of making the most of your own ISA allowances, (£20,000 for the 2017/18 tax year) and alternative investments can help to plan early. The benefit of starting early is you benefit from ‘compound interest.’ You can smooth out the rocky ride of the stock market by drip feeding money in each month. Think of it like buying clothes. Some months you buy them at full price, other times in the sale. The same applies to the stock market. Of course, if we knew when that would be we would all be rich! So by buying into the market each month, some months you’ll be buying high and some low. It spreads out the highs and the lows, reducing the overall risk.
6. Tap up Grandma and Granddad
A mini “starting fund” could be created with grandparents contributing as and when they wish.
If you die with an estate valued at more than something called the ‘Nil rate band’ the beneficiaries inheriting the money will pay 40% tax on the excess. You have annual exemptions which is an amount of money that can be given without any tax implications. For grandparents, they can make an annual gift of £3,000 per year. This is per grandparent- so £3,000 from Grandma and £3,000 from Granddad. It will not be taxed under the Inheritance tax rules. That is £6,000 per year that they could gift towards school fees. They can also go back a year and use last years £3,000 if this was not used. So that is £12,000 for this year.
Using their annual gift exemption and adding this to the starting fund would aid their own tax issues and also help future generation planning – a double win!
If the grandparents do this – get them to just write down on a piece of paper the date and amount it was given and keep it with their Will. Hint – Do not staple anything to your will as it could invalidate it!
7. Timing of the private school fees
Consider when to send them. Switching to private school at the age of 8 could save you a third off fees. So think carefully about whether private school is needed from day dot.
Alternatively, consider grammar schools – Using private tuition to get your child into a grammar school could be far more cost effective for you
Private schools are not right for every child! Take time to consider both the personality and academic abilities of your child before making a big financial commitment. Once you commit to paying, its hard to go back!
8. Probably the best one for most parents……Haggle!
“A third of pupils at independent schools are receiving some sort of reduction in fees,” says Ms Hamlyn at the Good Schools Guide consultancy. “This is obviously the savviest thing hard-pressed parents can do.”
Many schools will not publicise this so if you have a bright child but money is tight, consider a bursary or scholarship. Around one third of students receive some kind of scholarship.
You may also receive sibling discounts if more than one child attends the same school.
This blog has been written as a guide to investing and is not a personal recommendation.
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