How to pay for school or university fees tax efficiently
As part of unbiased.co.uk’s TaxAction 2014 campaign, we’re looking at the variety of ways you can save money by being using the tax reliefs available. Today we take a look at how you can fund school or uni fees in a more tax efficient way.
Funding private school fees is a big investment. According to the Independent Schools Council Annual Census in 2012 the average annual fees are £10,539 for junior school, £12,408 for senior school and £13,053 for sixth form.
“Depending on the bond value it is possible to use a combination of both methods of withdrawal and generate enough to meet the fees due – without incurring any immediate tax charge”
University fees (for England and Wales) are now around £9,000 pa – which doesn’t include the additional £7,280 for accommodation and food for students living away from home. This is a total of £16,280pa.
Education fees tend to increase more rapidly than inflation, so using 5 per cent pa should give a reasonable indication of future costs.
A very useful but often overlooked method of investing for funding private school fees is using an offshore investment bond and some of the advantages are:
1. The investment benefits from a privileged taxation structure which will boost the fund over time.
2. The bond can be split into smaller policies or segments allowing for greater flexibility when the fees are required.
3. No tax is deducted within the fund (except perhaps any withholding tax deducted in the country of origin which is non-reclaimable) which allows non-taxpayers to offset their personal allowance before any tax is due.
Who holds the bond?
If you as a parent or grandparent hold the bond, then on encashment of segments to meet the school or uni fees, any tax liability will be based on your own marginal rate. So, if you are a higher rate taxpayer, currently 40 per cent tax may be due.
But one way to avoid or reduce this tax would be to place the bond under a bare trust.
Child Education Trusts
You can appoint trustees to hold the bond. A bare or absolute trust is for named beneficiaries and it states at the outset the share of the assets for each beneficiary. This share cannot be altered in the future. A discretionary trust could be used where all beneficiaries are merely ‘potential’ beneficiaries and the trustees decide who gets what and when. However, under a discretionary trust, the tax treatment of any gains on the bond would fall on you as the owner.
There are two different ways of extracting cash when the fees are due.
1. The trustees can take a tax deferred withdrawal from the bond of up to 5 per year of the original investment. So for a bond with £100,000 invested, an annual ‘income’ of £5,000 may be payable. But tax would be due on any excess over the cumulative 5 per cent.
2. Alternatively you could fully encash one or more ‘segments’. This could result in an immediate tax charge but, when using a bare trust for grandchildren, any tax liability will fall on the beneficiary and, if children are still at school or university, they would likely be non-taxpayers. In addition, perhaps they have their personal allowance available to offset against any gain year on year.
Depending on the bond value when the fees are due it is possible to use a combination of both methods of withdrawal and generate enough to meet the fees due – without incurring any immediate tax charge.
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