insideKENT Magazine Issue 42 - September 2015 | Page 153
LAW
THE PRICE OF
EDUCATION
Educating your child
privately is a major financial
commitment and for many
this is just not possible to
fund through income
alone. Simon Leney, of law
firm Cripps, outlines some
alternative ways of paying
the fees.
Simon Leney
Often grandparents offer to help out but they need to be aware of Inheritance
Tax and Capital Gains Tax. It will usually be better for lump sums to be put
aside into a grandchildren’s trust, perhaps then supplemented by regular
top ups which can be made to qualify for Inheritance Tax relief. The good
thing about such trust arrangements is that they provide flexibility while
offering some financial certainty that school fees can be paid. Very often
(especially in Kent with our grammar schools) parents decide to switch from
private education to state at the secondary stage, so if there is unused
money in trust at that stage a properly worded trust will enable it to be used
for other expenditure on the children, including just helping parents with
their day to day costs. Grandparents can remain in control of the money
by being trustees, and the money is immune from divorce consequences.
Another approach, often used in tandem with a grandchildren’s trust, is to
make a lump sum payment to the school in return for discounted fees. A
number of schools have well established schemes, which allow a partial
refund if a child leaves the school before originally intended. Others simply
keep the money! And the level of discount varies. As with any advance
payment, one worry is what happens if the school closes, especially if it
goes into liquidation. The outcome in each case will depend on the exact
legal status of the cash in the hands of the school, which is governed in
part by the contract between payer and school and in part by general law.
Ideally, the cash is held in a ring-fenced trust by the school so that it cannot
be used to pay the school’s liabilities. Then worst case is that the money
is legally part of the school’s assets, when it will be available to pay creditors.
Where a grandparent or other relation has income, which they are willing
to use to help with school fees, they can do so without Inheritance Tax
worries if it is genuinely surplus income for them and if they enter into an
arrangement to pay according to some sort of pattern, whether monthly,
each school term or once a year. Again, this can be paid to the school or
via a family trust if the cash is not needed immediately.
For families where capital is not readily available, it is wise to start saving
early and there are a range of regular savings vehicles that could be used
including ISAs, insurance investment bonds and National Savings investment
bonds. These types of investments can be used directly or as investments
by a family trust. Detailed tax implications will vary, but as a rule of thumb,
a family trust will offer greater tax efficiency in the long term.
The newly introduced pension fund drawdown freedoms could offer an
opportunity though at a tax cost. Certainly using a pension fund to pay
school fees should be treated as a last resort, but the ability to draw down
capital (albeit at a tax cost) is worth keeping in mind.
Simon Leney
Partner
01892 506005
[email protected]
About Cripps
www.cripps.co.uk
@crippslaw
Cripps is a key regional law firm
serving clients nationally and
internationally from offices in Kent
and London. Recognised countrywide
for both its commercial and private
client work and Legal Team of the
Year (Midsize) in the 2014/15 STEP
Private Client Awards, the firm focuses
on wealthier families, entrepreneurial
businesses and the real estate sector.
Find out more at www.cripps.co.uk.
This article gives examples and is intended for general guidance only.
153