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