Steps to help fund private school fees on back of VAT hike

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Schools may be “out for summer”, but the real financial threat imposed by January’s introduction of a 20 per cent VAT charge on school fees might mean some school holiday plans for this year are more budget constrained than previously.

Seven months after the imposition of VAT, recent forecasts say it could mean fees may rise by more than £50,000 for every student over the next five years –a truly eye-watering sum.

School fees hurdle | Drazen - stock.adobe.com

EDINBURGH THE ‘CAPITAL’ OF UK PRIVATE EDUCATION

According to the education publication TES Magazine, the Capital of Scotland has the highest proportion of privately educated students of any city in the UK. Edinburgh City Council estimates this percentage to be 15 per cent, but it could be even higher. According to the Independent Schools Council, it is 6 per cent for the rest of the UK. There is no hiding the fact that the VAT fee increase has created a huge new financial challenge for many families.

In Edinburgh, day school fees typically range from £11,208 to £23,125 per annum. That is already a sizeable sum before the huge VAT increase.Such a rise could eventually see many families unable to cope. The Baines Cutler independent report suggests that as many as 20 per cent of Scotland’s private students will move to the public sector.

The priority for those who aim to continue to fund their child’s private education is for them to sit down with their financial planner over the summer and review all their options before it is too late. They need a new and affordable long-term, tax-efficient school fees plan.

A FOUR-POINT SCHOOL FEES PLAN AGENDA

This simple checklist provides a useful aide memoire:

1. Undertake a complete investment review. When establishing a new investment strategy to help fund school fees you could structure your capital in a widely diversified portfolio across world stockmarkets, fixed income assets, and property to help reduce investment performance volatility.

Simply holding cash deposits won’t grow your money as well as other assets over the longer term. But you will also have to decide what appetite you have for investment risk and create your portfolio accordingly.

2. Maximise the tax efficiency of your invested capital. It is difficult enough to structure your investments in a way to offer the best potential for the returns you will need to fund the increasing costs of school fees without your total being reduced by Income Tax and Capital Gains Tax.

Last month in Wealth Confidential, we wrote about the possible threats to Cash ISAs. But, given Chancellor Rachel Reeves’ commitment to encouraging more investment into the UK economy, it seems unlikely the overall ISA tax-free allowance will be reduced. It could even be increased for UK stock market investment.

Maximising your annual ISA tax-free investment allowances should be your first priority. That adds up to £40,000 for a couple.

3. Consider sheltering other invested assets in a tax-efficient international investment bond wrapper.

Once you have exhausted your ISA tax-free allowances, you could consider other tax-efficient wrappers for your school fees funding. These bonds are generally issued by major investment groups in the highly regulated Isle of Man financial centre and are sometimes overlooked in school fees planning.

This is a potential error, as their offshore status provides investors with a further level of valuable tax efficiency. And, unlike ISAs, there is no upper investment limit. The bond can also be split into smaller segments which can then be cashed in to fund school fee payments as they arise.

4. Open an ‘account’ with the ‘bank of granny and grandad’. According to the Saltus Wealth Index report, almost 80 per cent of high-net-worth individuals – defined as those with investable assets of over £250,000 – are still supporting adult children. And 40 per cent of them are already contributing to the cost of education for their grandchildren.

There are several ways that grandparents can help with school fees funding. All four grandparents could each put £12,000 into your school fees fund every year without any Inheritance Tax liability. They could also gift monies above that sum and, if they survive seven years after gifting it, this sum would also be Inheritance Tax free.

The imposition of 20 per cent VAT on school fees has proved to be an enormous financial challenge to some parents and grandparents.

Reassuringly, a tax-efficient plan can still be designed for you that could ease this fresh financial burden.

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