Parents or grandparents wishing to give their children or grandchildren the benefit of an independent education face startling costs. This is followed after school by the costs of a university education, which are also considerable. However, with careful planning, it may be possible to avoid a huge outstanding student loan or tax burden.
Choosing an independent school is a serious investment. Recent figures show that average boarding school fees stand at over £30,000 a year, with day-only attendance costing more than £17,000. These fees continue to rise, last year increasing by 3.5% compared to 2015[1].
Financial sacrifice for many parents
The overall cost for just one child can end up being about the same as buying an average home in the UK. That’s a massive financial sacrifice for many parents, leading them to wonder if it’s better to pay for their child’s education or save the money to help them onto the property ladder later in life. In any case, without planning ahead, the cost can be a huge money sink or lead to further borrowing.
There are a number of simple strategies to consider. The first option to consider is likely to be Individual Savings Accounts (or ‘ISAs’), along with directly held investments in the parents’ own name. This means that they will keep the right to access capital at any point with little or no tax liability through the ISA. In addition, the directly held portfolio can be used to take annual gains tax-free if within the Capital Gains Tax (CGT) allowance (£11,300 for the 2017/18 tax year).
Deferred rather than extinguished
Once ISA and CGT allowances have been used, further capital could be held via an investment bond. This allows a portfolio to be invested and offers the facility for 5% per annum to be drawn on a tax-deferred basis (deferred rather than extinguished), which can be particularly useful when it comes to paying annual school fees.
Investment bonds offer UK resident individuals a number of attractive benefits. The allowance is tax deferred, rather than ‘tax-free’. If the 5% withdrawal allowance is not taken in any policy year, the unused allowance can be carried forward on a cumulative basis. If a withdrawal is taken which is over the 5% cumulative allowance, the excess is added to the policyholder’s other taxable income and taxed as savings income in the tax year in which the policy year end falls. On the final policy encashment, all previous withdrawals are accounted for when calculating the overall policy gain.
Reduce the tax liability on any excess
Top slicing relief may reduce the tax liability on any excess, but any withdrawals in excess of the 5% annual allowance should be discussed with us to find the most tax-efficient way to do this.
Source data:
[1] Independent Schools Council, annual census 2017
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
