Private school fees rocket 3.7%

The latest annual survey by the Independent Schools Council, published today, has revealed yet another year of sharp private school fee inflation, with average fees rising an eye-popping 3.7%. This is almost double the rate of consumer price inflation and well ahead of earnings growth. The ISC highlights a significant increase in the amount employers are required to contribute into the teachers’ pension scheme as a major factor driving the sharpest increased since 2014, but the latest data continues a longer-term trend of high school fees inflation which has also been exacerbated by an “arms race” between schools to add new facilities.

Despite the rising costs, pupil numbers at independent schools are estimated to be at record levels. A private education is an aspiration that many middle class parents have for their children as they weigh up the advantages of small class sizes, often excellent sports facilities and the breadth of extra-curricular activities that many independent schools offer.

A Big Price Tag

While independent schooling appears to be more popular than ever, attending them comes with a big price tag. The average annual term fee for a senior day school is now £5,009 (£15,027 pa) and £11,304 per term for boarding school £33,912 pa) – though there are big regional variations. But the most prestigious public schools can be in excess of £40k per year for boarders. This means that the cost of sending a child to a private school for their entire school education to the age of 18 could easily be in excess of £250k and by over £165k for just secondary school. And don’t forget that on top of these there are extra costs to endure: trips, clubs, uniforms and sports kit. The already formidable costs of an independent schooling could potentially leap by 20% under Labour plans to add VAT to them.

Don't Embark on a Journey You Can't Finish

The ability to finance such costs on a pay-as-you go basis out of taxed income is clearly a colossal commitment even for affluent families with high earnings. For families determined to give their children an independent education, it is therefore important to plan carefully and as early as possible to ensure they have a game plan to meet these costs and to not just embark on a journey that they may not be able to finish. The last thing any parent will want to do is disrupt their child’s education and friendships part way through because they have run out of financial resources.

Families Need to Talk

School fee planning will in large part depend on whether the parents are going to have to soldier this burden alone, or whether other family members, notably grandparents, might be involved.

Grandparents are often pivotal in supporting children through private education. It is natural to want ot help their familites out and such lifetime financial assistance can also be very sensible in helping mitigate a future inheritance tax liability. In thinking about the prospect of sending a child to an independent school, it really does make sense to have a frank, family-wide discussion at the outset, but it is clearly also vital that grandparents do not gift assets that they may in turn need to later survive on. This is why cash flow modelling is the cornerstone of a good financial plan.

Plan and Invest

The first step is to establish at what age the child is expected to start attending a private school. Some parents will chose this at the outset, when the child is aged four, or perhaps prioritise this entry at age 11 or 13. With some assumptions on school fee inflation, this will help determine how much funds might need to be generated in each year and, in turn, match any investment strategy to this liability profile. Higher risk investments such as equity funds can be used to fund costs that are many years away, with cash or less volatile assets used for the earlier years on the nearer horizon.

Where grandparents are involved, from a tax perspective it is really best they do this directly rather than by gifting money to the parents. Regular gifts out of surplus income, which do not affect their own lifestyle, are exempt from inheritance tax and could therefore be used towards part payment of fees or other costs. However, any lifetime gift is potentially exempt from an estate for the purposes of inheritance tax, providing the person who makes the gift lives another seven years.

Setting Up a Trust

A very simple option used in such circumstances is to set up a “bare trust” on behalf of the child, so that the grandparents – or other family members – gift the money to their child, but the trustees retain full control over where the assets are invested and drawn down upon until the child is aged 18, at which point they will take full legal control. Bare Trusts are looked through for tax purposes which means that the beneficiary, e.g. a grandchild, will be deemed the ultimate owner of the trust assets and taxed as if they owned them directly. This is useful as it allows the use of the child’s income tax and capital gains tax allowances/exemptions, which are typically available in full as children very rarely have any other taxable income.

By using the child’s allowances, investments held in a bare trust established by their grandparents could work out as being as tax efficient as an ISA since any income generated would need to exceed their personal allowance, personal savings allowance or dividend allowance before becoming subject to tax. Withdrawals that involve selling an investment and crystallising a gain would take place against the child’s annual capital gains exemption and even were this to be exceeded it is highly likely that any capital gains tax would only be incurred at the 10% rate as the child is highly unlikely to be a higher rate tax payer.

The gift into the bare trust would be a Potentially Exempt Transfer for IHT purposes, meaning there could be IHT to pay on it if the grandparent doesn’t survive the gift by 7 years. Nonetheless, that risk can be covered by a simple and usually quite cost effective 7 year insurance policy (depending on the grandparent’s health). That gift would need to be considered within the wider context of the grandparent’s financial circumstances to ensure that they can afford to irrevocably gift this amount, and also in conjunction with other gifts that the grandparent has made over the preceding 7 years (to ensure that we capture all of the possible IHT risks).

Another thing to consider is whether it is possible to fund a school fee plan upfront with a single lump sum transfer into a bare trust. From a tax perspective, if you are in a position to do this, it is far preferable to pay fees directly and regularly to the school as and when they are due. A single, potentially exempt transfer would not be subject to any immediate tax and would start the 7-year rule ticking whereas paying fees as you go on behalf of a grandchild is treated as a chargeable lifetime transfer. Chargeable lifetime transfers attract an immediate charge to IHT once their cumulative value over any rolling 7 year period exceeds the nil rate band, which could happen where grandparents are funding multiple children at top public schools.

So while the ever-increasing rise in the price of school fees may deter some parents from pursuing the Independent School avenue, with the correct financial planning, it may be easier than you think to afford the very best education for your child.