School fees rise at lowest rate since 1994, but still faster than wages
- Average day fees now £4,702 per term
- Or £14,102 a year (compared to £13,623 last year)
- 3.5% average rise, the lowest fee increase since 1994, with increasing amount of fee assistance
- Compares to average wage increase and inflation both at 2.3%
- Homework - How to plan for school fees
- Bare trusts in detail
The Independent School Council has released their annual census. You can find it here.
School fees of £14,102 per annum will cost:
- a higher rate taxpayer £23,503 from gross income to allow for 40% income tax
- a basic rate taxpayer £17,627 from gross income to allow for 20% income tax
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown:
"School fees continue to ramp up faster than wages, providing parents with extra income headaches. Paying school fees makes a big dent in take-home pay and uniforms, sports kits, school trips and musical instruments push these costs even higher, so parents need to do their homework when it comes to planning for private education. Drawing income from an ISA and using the CGT allowance are both very tax efficient ways to raise cash to help meet fees.
Junior ISA works well for university fees and a simple bare trust arrangement is the better option for parents and grandparents looking to plan ahead for school fees, and both can be part of an inheritance tax saving strategy."
How to plan for school fees
1. Use ISA investment income
Income from an ISA investment is free from UK tax and with current yields, a £100,000 equity income ISA portfolio could generate £4,000 a year tax free.
2. Spend capital
Cashing in stocks and shares ISA can be done at any time without capital gains tax.
Alternatively each year investors can realise gains (profits) from a share or unit trust portfolio tax-free as long as these do not exceed the capital gains tax allowance (£11,300 for 2017/18).
3. Fixed term investments and bonds
Fixed term investments and bonds aim to provide a return of capital and a set amount of interest at maturity. These investments could be timed to meet school fees as and when they are due. The best examples are fixed term savings accounts but could also be P2P investments. Using ISA ensures the interest is tax-free, although the interest may fall within the personal savings allowance in any case.
4. Insurance investment bonds
Insurance investment bonds allow the withdrawal of 5% of the original capital invested without immediate charge to personal tax. Generally speaking these types of investment only suit higher rate taxpayers and only then after other avenues such as ISA have been used.
5. Borrow using a flexible mortgage
A flexible mortgage allows you increase your borrowings against your property to a pre-agreed limit without the need the costs or time involved re-mortgaging. In the short term, the low cost of borrowing means this can be a cost effective route. However the interest costs compound the longer you borrow.
6. Plan ahead using a bare trust
An investment account under a bare trust is a simple and tax efficient way of investing for a child or grandchild for school fees.
Bare trusts in detail
A bare trust is a simple, binding legal arrangement that anyone can set up. Assets (e.g. investments) are held by a trustee (e.g. a parent or grandparent) for the benefit of a beneficiary (e.g. a child). There’s no limit on what or how much can be put into a bare trust (from an investment perspective). The child becomes entitled to the assets in the trust when they turn 18. However, the trustees can make withdrawals at any time as long as they are for the child’s benefit – such as paying school fees.
How a bare trust is set up
A general investment account is set up with the intention of creating a bare trust using a simple one page application. Money is added to the account either as a lump sum or by regular savings and is then invested.
Firstly, the assets in a bare trust are taxed as if they are the child’s. However in most cases the income or gains fall within personal allowances and exemptions and there is no tax to pay. There is also no CGT to pay when the child eventually takes ownership of the assets at age 18, as they are already the beneficial owner (unless they sell the investments).
The one exception to the rule concerns gifts put into trust by a parent. If the income from these exceeds £100 per year, it will be taxed at the parent’s marginal rate and the parent will have to declare it on their own Self-Assessment tax return. This income may still be tax-free if it falls within the £5,000 dividend allowance. Alternatively parents may prefer to invest in growth funds with no or a low yield.
Inheritance Tax: Assets paid into the trust will either fall within the annual IHT exemption (up to £3,000 a year which is exempt immediately), the small gifts or ‘gifts out of excess income’ exemptions, or be a Potentially Exempt Transfer (PET). A PET is dependent on the donor surviving seven years beyond making the gift for it not to form part of their estate for IHT purposes. If the donor does not survive seven years, the beneficiary may need to pay IHT.
What happens at age 18?
If you set up a bare trust for a child, then you are legally obliged to tell them about it, if they don’t already know, when they turn 18. Assuming some assets remain in the bare trust, the child becomes absolutely entitled to them. However, there is no automatic ‘transfer’ of the assets to the child, unlike some accounts for children. The child sets up their own general investment account, the assets are transferred over and can continue to be invested or cashed in as the child sees fit.