BUY TWO, GET ONE FREE – HOW TO CUT THE REAL COST OF A PRIVATE EDUCATION

A survey by Lloyds Private Banking recently published figures which suggest that the cost of a private education in Britain has risen by 49% over the last decade.  Their report suggested that the average annual cost for a day pupil is in excess of £14,000.  Even outside of London, the cost of sending a child to independent school can cost over £150,000 (over a school lifetime 5-18) before one even thinks about University!  A further recent study suggested that the cost of private education in 2019 rose at over twice the rate of inflation.  Multiply these figures up for multiple children and the sums required are huge.

It gets worse because, generally, school fees are paid out of taxed income.  Even if we work on the average annual day fee of £14,000, a parent would need to earn over £24,000 gross in order to take home £14,000 net (assuming a 40% marginal tax rate).  Even if a parent is able to access funds by way of dividend from a family company rather than salary, the funding requirement would still be almost £21,000 (more for a 45% taxpayer).  This represents the real cost of a private education.  For families with a number of children the costs can start to become prohibitive (even for the wealthiest of parents).

We have been able to save significant sums for our clients by utilising the school child’s own personal tax allowances (and potentially lower tax band).  A dividend payment of £14,000 directly to the child would be fully covered by the personal allowance (currently £12,500) and the dividend allowance (currently £2,000).  The tax-free funds can then be used to pay the school fees.  This saves, in our examples above, between £7,000 and £10,000 per annum.  Do this planning for two children and the third would be free in real terms! A bargain!

Typically, such planning would be structured via a school fees trust which could be funded by either cash or assets (shares in a family company are ideal) but if a trust does not appeal then a family investment company is a popular choice in the right circumstances.

As always, the devil is in the detail and that is where Wright Vigar come in.  We have significant experience in helping families to set up such structures tax efficiently and are always happy to have an initial informal and free of charge chat.