School fees can be a very large expense for families, particularly if more than one child is of school age at a time. It is important to plan ahead if possible to minimise the impact of this financial burden.
Below are a few options that may be available however it is recommended that you seek advice from a school fees planning specialist such as Independent School Fees Solutions Ltd (who can be contacted here) before implementing any ideas as it is a complicated area.
Possible options and thoughts when planning for school fees*
Pensions
For parents (or grandparents) who are over the age of 55 while the children are at school there is an option to take up to 25% of the pension pot tax free, to pay for school fees. This will decrease funds available at retirement however. An alternative option is to invest more money in a pension before 55 to receive the tax relief and pay back any borrowing that was needed at 55 using the tax free 25%.
Capital Gains Tax allowance
Both of the parents and the child have a CGT allowance which can be utilised. It is likely that no CGT will be paid if the funds are spread over all three people unless large gains are made in any year due to many children being educated at once.
Personal allowance of the children
The personal allowance of your child can be used and if the income is less than the personal allowance interest can be paid gross.
ISA allowances
You can invest up to £10,200 in stocks and shares in the 2010/2011 tax year in an ISA, with £5,100 allowed to be held in cash. Up to £5,100 of this amount can be saved in cash with one provider. The remainder of the £10,200 can be invested in a stocks and shares with the same or another provider.
Using the business
If funds in your business exist this can be used for school fees and further funds can be borrowed for the business where the interest on the loan repayments may be tax deductable (if for business purposes).
Friendly Society Tax Exempt Savings Plans
No capital gains tax needs to be paid at the maturity of the policy. You can invest up to £25 a month, tax-free.
Collective investments
These are investments where the value of your money invested can go down as well as up. They can carry a certain amount of risk and should be used for long-term planning of at least five years, not short-term growth. Firstly your ISA allowance should be used before investing outside the tax sheltered wrapper.
Unit trusts and OEICs are pooled funds where individuals buy units in a fund at a published price. The fund then buys assets in equities, bonds or cash within their investment remit and the fund is wholly reliant on the performance of the assets. The fund is open i.e. unlimited numbers of people can invest in the fund - the fund just issues more units and invests the money in more assets.
An investment trust is a company, which invests in other companies. Investment trusts are listed on the Stock Exchange, have an independent board of directors and a pool of shareholders like other public companies. An investment trust has a team of salaried staff or, more commonly, contracts the services of a specialist fund management company. There are many types of investment trusts including zero dividend preference shares.
OEICs are open-ended investment companies. Although an OEIC is structured along similar lines to a unit trust, it differs in having no bid/offer spread. This means buyers and sellers get the same, single price. Additionally, OEICs have an umbrella structure allowing numerous sub-funds investing in different types of assets, so the investor can switch more easily between different specialist areas.
National Savings and Investments
There are many types of national savings available suitable for different people e.g. Children's Bonus Bonds and Pensioner Bonds. As the rates of return change regularly, and the tax-treatment varies from product to product, one of the best places to get current information is at www.nsandi.com. Again an IFA can advise you as to which National Savings and Investments product is suitable for you.
Individual shares
Any investment in stocks and shares need a long enough lead-time to iron out any stock market volatility. Try to use up all your tax-free allowances by placing your shares in an ISA first.
Investment bonds
Investment bonds have no overt income. You can take 5% of your original investment for up to 20 years free of immediate tax until you cash them in. Then the 'chargeable gain' is divided by the number of years you have held the bond (called 'top slicing') and charged against your income tax rate at the time.
But there is no tax to pay unless you are a higher ratepayer, then you pay tax at 18%. As with most investments, the longer you hold them, the better your return is likely to be. Be aware, any investment period less than five years is unlikely to show you a decent profit.
Inheritance tax for grandparents and parents
Many grandparents may have assets over the IHT threshold and can give this away early to pay for part of the school fees. For current IHT rates see HMRC.
Protection
It is important that the funds required for school fees are protected in case of death or if unable to work.
* The options highlighted are not recommendations but purely observations of possible areas to explore. It is recommended that you seek advice from a school fees specialist.