WE HAVE devised a model that can significantly reduce, and potentially eliminate, the tax burden that comes with privately educating children, which is aimed primarily at higher rate taxpayers who own their own businesses. Since it was introduced a year ago, we have saved our clients tens of thousands of pounds.
For families interested in this option we have to take a number of factors into consideration including income, the number of children they have and the cost of their school fees, and most importantly, the structure and value of their business.
One option we suggest is the use of a trust settled by a grandparent, or another relative, with income arising to the trust used to meet the schooling costs of the beneficiaries. The tax-efficient trust can be established at any point, even before schooling begins, and can operate for as long as required – covering all costs relating to the child or children from nursery to university fees and even first property deposits.
For instance, we were able to save a client paying annual fees of £25,000 for two children in private education around £8,000 a year by transferring their business to a limited company with a trust set up alongside. This structure allowed them to remove the tax liability associated with drawing funds generated by their business to pay for school fees. The benefit of the trust is that on top of the savings they’ve already made, they can continue to make further savings, not only when their children move on to higher education, but for as long as the trust exists.
Not surprisingly this type of structure is proving popular with higher rate tax-paying clients, particularly as it doesn’t involve a large sum of money up front. But there are other benefits too. On top of potential savings of up to 50 per cent on the income tax required to pay school fees, no capital gains tax is payable on the transfer into the trust and no inheritance tax is payable, providing the value of the assets transferred are within the nil band rate. In addition, other assets such as rental properties or shares in a portfolio can be settled on the trust in place of or in addition to shares in the family business.
Currently, this model works mainly for those who own a family business, however we are investigating a more tax efficient solution for people in employment who pay private school fees. As such, there is no one-size-fits-all when it comes to tax planning for school fees, but circumstances can change and planning is best carried out well in advance. Particularly as it is likely that school fees will continue to rise.
Rhona Mackinnon is a chartered tax adviser with Scottish-based independent chartered accountants Campbell Dallas.