Giving a child a private education is not cheap and could be much more expensive. Parents can already expect to spend around £18,000 a year on day schools, or £43,000 on boarding schools.
With the election just around the corner, Labor has pledged to impose VAT on private school fees if it wins, instantly raising prices by 20 per cent. Removing the current VAT exemption will raise around £1.5bn, according to the Labor Party, which it plans to use to increase funding for state schools.
The move is understandably causing panic among private school parents.
Parents can already expect to spend around £18,000 a year on day schools, or £43,000 on boarding schools; costs £47,535 at Charterhouse School in Surrey, pictured.
“Even before the prospect of VAT being imposed, rising rates have made many think twice about sending their children to private school,” says Carl Green, director of financial planning at the wealth management firm Evelyn Partners. “But a 20 percent tax would be a deal breaker for many more.”
However, there are a variety of ways parents can reduce the bill.
1. Payment of fees in advance
This requires a sizeable lump sum – tens of thousands of pounds, no less – but can result in significant savings. The discount generally ranges from two to five percent, depending on the school and how much you pay up front.
Most independent schools are registered charities, meaning they can put your money in low-risk investments and pay no tax on the profits. So they can invest the money and get a higher return than you would receive after taxes. They then share that benefit with you.
2. Offshore bonds that can pay according to the term
Investment bonds issued by companies outside the UK can be a tax-efficient way to pay school fees.
The benefit is that the investment can typically grow largely tax-free, increasing returns.
Parents can create one and name themselves as trustees and their children as beneficiaries.
The bond is then divided into several different policies, enough to cover the fees for each term. When paid, the tax on the gain will be paid by your child and not by you. This means that your child’s tax relief and tax rate, which tends to be lower, will be used, reducing your tax bill.
3. A lump sum of your pension
You can take a quarter of your pension as a tax-free lump sum when you turn 55, which can be a tax-efficient way to pay the fees. Furthermore, firstly, there is a tax relief on pension contributions.
However, as this money may be available a little later in life to cover school fees, another option is for a grandparent to gift the lump sum of their pension.
This adds another tax benefit as, provided they live seven years after making the gift, it could also reduce a future inheritance tax bill.
4. ‘Gifts’ that avoid inheritance tax
If you or the child’s grandparents are worried about inheritance tax, paying school fees can be a great solution. Regular gifts of income are exempt from inheritance tax, as long as they do not affect your standard of living.
Let’s say your annual income is £50,000 but you only need £40,000 to survive; The remaining £10,000 could help with school fees and, in doing so, transfer his estate in a tax-efficient way.
5. Make the most of scholarships
According to the Council of Independent Schools, more than a third of private school students receive some form of financial aid from the school.
The scholarships are offered to low-income families and mean they pay reduced fees or nothing at all. These scholarships are means tested and the criteria vary from school to school.
According to the Council of Independent Schools, more than a third of private school students receive some form of financial aid from the school.
6. Scholarships that They are open to anyone
Unlike scholarships, scholarships are not aimed at low-income families, so anyone can apply for them.
They are designed to help especially gifted children get the best education possible. If your child is talented academically, athletically, musically or artistically, it is worth investigating scholarships.
They typically reduce fees by about 10 percent, but may be awarded in conjunction with a scholarship.
When choosing a school, prepare a short list and then find out at each school what scholarships your child might be eligible for.
7. Create a family business that pays dividends.
If your child has wealthy grandparents who want to help with education costs, they could set up a family business and name their children as shareholders. They would then put income-generating assets into the business, perhaps property or shares.
When school fees are due, the company will pay a special dividend to cover the costs. The dividend would be taxed using tax allowances and the child’s tax rate, which is likely to be lower than her grandparents’ rate.
Parents should not do this, as there are rules that prevent them from trying to take advantage of a child’s tax situation for their own benefit.
8. Check if there are bigger discounts for siblings.
Many private schools offer a discount for siblings. For example, Clifton College in Bristol offers a five per cent discount for the second child, 20 per cent for the third and 50 per cent for the fourth or more.
There may also be discounts for children of members of the Armed Forces, private school teachers and members of the clergy. These reductions are rarely advertised, so be sure to ask.
9. Look for deals close to home
Fees can vary greatly from school to school. “It may be worth considering day care where possible rather than boarding,” says Alexandra Loydon, director of consultancy and member engagement at St James’s Place.
10. Focus on the most crucial school years
Consider combining state and private education so you can focus your funds on the most important school years. You could send your child to a state school during their primary and early secondary years and then pay for private education during their GCSE and A-level years.
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