How grandparents can tax-efficiently help to fund private school fees

The cost of private school continues to soar, with many families relying on financial help from grandparents to help them cover fees.

According to the Independent Schools Council (ISC) 2018 census, published in April this year, average school fees increased by 3.4% between 2017 and 2018. The average termly fee for private day school now stands at £4,618, while the average termly fee for boarding is £11,228. The average annual cost of day school is therefore £13,854 and for boarding more than double this at £33,684.

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Despite these steep costs, there are 529,164 pupils at private schools in the UK, up from 522,879 in 2017. This is the highest number since records began in 1974.

Planning for private school fees

Parents need to start planning for school fees as early as possible – ideally as soon as they have children. Tony Mudd, Development Director at wealth manager St. James’s Place said:

“Generally, parents looking to fund school fees fall into three categories – those who want to invest a lump sum, those who would like to pay out of income, or parents wanting to set up a regular savings scheme to provide funds to cover future fees. There are several options available to help make school fees more affordable, that can be both tax efficient and flexible."

"For example, you could consider using your annual individual savings account (ISA) allowance, allowing tax-free contributions of up to £20,000. By investing the maximum amount permitted in a stocks and shares ISA and selecting well-managed funds, a very worthwhile sum could potentially be accumulated in time for their first term.”

However, many people won’t be able to save enough to cover school fees, which means an inheritance or financial support from grandparents may be the only way for them to pay for a private education.

For expert guidance on tax efficient investment, request our free guide or talk to an expert without obligation from our long term partner St. James’s Place Wealth Management.

How ‘the Bank of Granny and Grandad’ can help

There are several ways for intergenerational wealth to be passed on from grandparents to help with their grandchildren’s school fees costs. These often have inheritance tax (IHT) benefits for the person making the gift:

Lump sum gifts

For example, if a grandparent makes a lump sum gift to help with school fees, the gifted amount will fall out of account for the purposes of calculating IHT on the grandparent’s estate if the grandparent lives for at least seven years after making the gift. Regular gifts which are made from surplus income that don’t affect the grandparent’s standard of living, known as ‘normal expenditure out of income’ are immediately IHT exempt.

Bare trusts for grandchildren

A ‘bare trust’ is a legal arrangement where money or assets can be set aside by grandparents for the benefit of their grandchildren. The child becomes automatically entitled to the funds held in the bare trust once they reach the age of 18, but the trustees can distribute some of this money earlier if they want to, for example to help cover the cost of school fees.

There is usually no tax to pay as long as income generated by the investment is within the child’s personal allowances and any gains made are within the child’s Capital Gains Tax allowance (which is £11,700 in the current 2018/19 tax year).

Implications for inheritance tax

Always seek professional advice on the IHT implications of gifting funds for education, as IHT can be a complex area and rules may change over time. It’s also important to keep careful records of any gifts made too, as these can be used to support any claim made by executors of a will that gifts are exempt.

For expert planning advice in this area, you can request a free guide to inheritance tax from our long term partner St. James’s Place Wealth Management or take advantage of a no obligation financial review.

The value of an investment with St. James’s Place will be directly linked to the performance of selected funds and may fall as well as rise. You may get back less than the amount you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and depend on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

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St. James’s Place representatives represent only St. James’s Place. The Telegraph Investment, Retirement & Tax Planning Advice Service is provided by St. James’s Place Wealth Management plc, registered in England, registered no. 4113955, registered office St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP. Telegraph media Group is an Introducer Appointed Representative of St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority. Telegraph Media Group Limited, 111 Buckingham Palace Road, London, SW1W 0DT, company registration number 451593.

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