While many parents value the standard of education offered by independent schools or universities, the costs can be daunting.
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. Latest 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. (source: Independent Schools Council, annual census 2017).
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 is light at the end of the tunnel however - particularly if grandparents are in a position to help.
The bank of Grandmum and Granddad
Look at the example of grandparents Tony and Jane, who are keen to help their grandson Josh get a good education. They have invested £120,000 in an international investment bond, which is divided into 12,000 individual segments of £10.
Tony and Jane transfer the bond into an absolute (bare) trust with Josh as the beneficiary and his parents, Mark and Alison, as co-trustees. This is to ensure continuity if anything happens to Tony and Jane.
It will be a potentially exempt transfer (PET) for inheritance tax purposes of £60,000 each.
When school fees become payable the trustees surrender individual segments. Now, as the bond is under a bare trust the gain is assessed on Josh who is a non-taxpayer, being a schoolboy without any earnings or investment income.
The gain is offset against his personal allowance – which is currently £11,500, but presumably will be higher in five years’ time. He also has his £5,000 starting rate for savings income band and the £1,000 personal savings allowance, both of which can be used to mop up international investment bond chargeable gains.
If Tony and Jane had used a similar investment bond to pay for the education, without transferring it to Josh via a trust, it could result in them paying a tax bill.
It’s a strategy that can work just as well for university fees. But remember, if parents Mark and Alison want to fund Josh’s education using an absolute trust has no advantage. This is because any chargeable gains would be assessed on Josh’s parents because of anti-avoidance parental settlement rules.
At age 18 Josh will be entitled to the remaining segments in the trust fund (if any) and can use them for his own purposes. This includes using the excellent education he’s received so far (thanks to devoted grandparents) to go to university.