Three ways to fund increasing private school education fees
The continual rise in the cost of private school is a worrying phenomenon for many parents who are considering private education for their children.
The main driver behind the high fees of today is economic in nature and can be attributed mostly to a high inflation rate. However, it is political forces that may pose a bigger problem in the long run.
With the Labour Party’s conference having just concluded, it has been widely reported that should they gain a majority in Westminster next year, Labour will remove the tax benefits available to private schools, scrapping the VAT exemption. Such a policy would dramatically hike the cost of private education by adding a further 20% to school fees.
In recent months the number of our clients seeking advice on this issue has surged and the good news is that there are several routes available for parents and grandparents who are considering private education and want to know how best to plan for fee increases.
Please note: some of the ideas in this blog post involve an element of investing. As is the nature with investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings.. In addition, the ideas set out in this blog post are based on our current understanding of UK legislation, impacting only those within the UK tax system.
1. Pay the fees upfront
The simplest solution available for parents concerned that the excessive rise in costs may soon price them out of the market is to pay the fees upfront. If you have the cash available today, following this approach could potentially save you thousands in the long run, especially if the VAT exemption is scrapped. The exact amount you could expect to pay will vary on the school you choose, its specific policies, and your ability to negotiate. Assuming you have both the capital and the desire to take this route, the next major consideration is cash flow planning.
The ability to plan your cashflow, that is to evaluate and balance your income and expenditure to meet financial goals, is an essential tool for any individual looking to manage and grow their wealth. Our Wealth Planning team can help you review your income streams and organise your expenditures to help you generate the cash needed to pay fees upfront.
2. Boost your savings
For parents who do not want to commit to paying fees upfront, it is important to consider how you are going to generate and maintain the income necessary to cover a potential increase in fees for years to come. With inflation still at uncomfortable levels, robust investment management becomes crucial for meeting this goal. The good news is that there is a plethora of options available to investors depending on your time horizon and risk tolerance.
Bonds and gilts, for example, have proven a popular asset class this year. Their fixed-term nature makes them an ideal choice for investors who have a set date they would like to see a return by, making them a strong option for parents looking to generate income ahead of paying tuition fees.
Our recently launched Gilt Saver Service, run by our dedicated Fixed Income team, aims to help investors fully capitalise on the opportunity in this asset class through decisions like buying sterling denominated bonds exempt from Capital Gains Tax. This service may also be suitable for schools that operate their own charities, who are experiencing an influx of capital and seeking to invest these funds responsibly.
For those looking to generate larger returns, equities offer the greatest potential for investment growth, provided you are comfortable with a higher level of risk. Another consideration is the tax efficiency of your investments, making full use of tax wrappers such as your annual ISA allowance goes a long way in preserving and growing your wealth.
3. Pass wealth to the next generation
For families with younger ones, the thought of sending their children or grandchildren to a private school may be distant and it can be easy to put it off as something to be dealt with in the future. Whilst rising tuition fees may not be on your agenda today it is always best to plan as far ahead as possible to ensure that when the time comes, you are financially prepared.
In the longer run, families should begin to consider how they will pass down their wealth to the next generation in a tax-efficient and timely manner.
When considering what individuals with young grandchildren can do to help them save for private school, gifting is a good place to start. The current gifting allowance in the UK is £3,000, meaning you can gift this amount to your family every year in the form of cash or another asset, e.g., property, and potentially reduce your inheritance tax bill in the process. In addition to this, there is the lesser-known regular gifts out of surplus income exemption, which allows those with excess income to make gifts for the difference between their income after tax and their expenditure – provided it is done on a regular basis, such as for the payment of school fees.
Another tax-efficient method commonly used to pass down wealth is via a trust. The tax benefit of using trusts comes in the fact that the value of the trust can be taxed as if it belongs to the recipient, usually a child, meaning very little or no tax will be paid – though this would only be the case where the money did not come from the parents.
More ways we can help with planning your finances
Although rising costs can seem intimidating there are still plenty of viable routes available for families who want to fund private school education. Whether private school fees are an immediate reality for you or a little further off, our Wealth and Financial Planners can help you plan a bright future for your family.
While robust investment management offers a proven route to generate funds for private education*, our Wealth Planning Service may also be able to help identify further opportunities to make the most of your money**. We also offer an integrated Wealth Management service across planning and investing, as we believe working with a Wealth or Financial Planner is the most effective way to make your finances go further.
For personalised advice on how to structure your family finances, speak to an Adviser.
* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.