This is the second in a three-part series about how to save for private school. Yesterday we analysed how much you’d need to put away depending on your child’s age. Come back tomorrow to find out how to invest so your fees pay for themselves.
The cost of sending a child to private school has rocketed in recent years. Fees have jumped by about 4pc a year since 2016 while wages have risen by 3pc a year or less. This year average salaries are expected to fall due to the pandemic.
This has meant that annual schooling costs, including extras such as uniforms, are now worth around 40pc of the post-tax salary of the average doctor, according to calculations by Killik & Co, a wealth manager. For an accountant the figure is 65pc. By 2032 this is projected to rise to 45pc and 74pc respectively.
There are ways to cut the cost by paying less tax as you save. Here Telegraph Money outlines the best methods.
Before they get involved in anything more complicated, parents should first make sure they have used their full Isa allowance, which is £20,000 per tax year per adult. Any returns made on money saved into an Isa can be put straight towards paying for a child’s education without the taxman taking a slice of the profits.
Carla Morris of Brewin Dolphin, a financial planner, said: “If you are not planning on drawing out the money for five years, then a stocks and shares Isa should give you better returns than a cash one.”
2. Offshore bond
Families who have maxed out their Isa limits can invest a lump sum to pay for school fees in an offshore bond. They would name themselves as trustees and their children as beneficiaries so that the latter would be liable for tax incurred by any gains.
The children are unlikely to have to pay anything unless the income breaches their tax-free personal income allowance. The bond can be split into individual policies which can be used to cover, for example, one term’s school fees.
Killik’s Svenja Keller said: “Offshore bonds merely defer tax, unlike Isas where contributions and withdrawals are made without tax. In the right circumstances it is still possible to be very tax efficient with offshore bonds but it requires more planning.”
Offshore bonds can be held within a bare trust, which have their own tax advantages.
3. Bare trust
Grandparents can also help out while cutting their tax bill. They could set up a bare trust, which allows them to hold investments on behalf of a beneficiary: in this case a grandchild.
Any funds placed inside the trust are usually exempt from inheritance tax unless the person who contributed them dies within seven years of doing so. There is no limit on how much can be put into a bare trust.
Ms Morris said: “The child becomes entitled to the funds when they turn 18. However, withdrawals can be made at any time as long as they are for the child’s benefit – in this example, to pay school fees.”
4. Family business
Another option is for grandparents to set up a family business, with their children named as shareholders. They will then be able to transfer up to £11,500 tax-free to younger family members by paying it out as dividends.
Because the grandchildren are unlikely to be earning, they shouldn’t have to pay tax on these dividends. However the family would need to be operating a legitimate business to prove to HM Revenue & Customs they were not simply trying to avoid tax.