School fees rise 3.5%: how to plan for the cost of children’s education
Average private school fees cost £4,702 per term or £14,102 a year, up from £13,623 last year, according to the Independent Schools Council. This is a 3.5% average rise which is the lowest fee increase since 1994.
However, Hargreaves Lansdown said this is higher than the average wage increase and inflation at 2.3%.
Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “School fees continue to ramp up faster than wages, providing parents with extra income headaches. Paying school fees makes a big dent in take-home pay and uniforms, sports kits, school trips and musical instruments push these costs even higher, so parents need to do their homework when it comes to planning for private education.”
How to plan for school fees
If you want to send your offspring to a private school, financial planning can make it more affordable. The experts at Hargreaves Lansdown shares their tips on how to plan for school fees.
1) Use ISA investment income
Income from an ISA investment is free from UK tax and with current yields, a £100,000 equity income ISA portfolio could generate £4,000 a year tax free.
2) Spend capital
Cashing in stocks and shares ISAs can be done at any time without capital gains tax.
Alternatively, each year investors can realise gains (profits) from a share or unit trust portfolio tax-free as long as these do not exceed the capital gains tax allowance – £11,300 for 2017/18.
3) Fixed term investments and bonds
Fixed term investments and bonds aim to provide a return of capital and a set amount of interest at maturity. These investments could be timed to meet school fees as and when they are due. The best examples are fixed term savings accounts but could also be Peer to Peer investments. Using ISAs ensures the interest is tax-free, although the interest may fall within the personal savings allowance in any case.
4) Borrow using a flexible mortgage
A flexible mortgage allows you to increase your borrowings against your property to a pre-agreed limit without the costs or time involved in remortgaging. In the short-term, the low cost of borrowing means this can be a cost-effective route. However, the interest costs compound the longer you borrow.
5) Plan ahead using a bare trust
An investment account under a bare trust is a simple and tax efficient way of investing for a child or grandchild for school fees. It is a simple, binding legal arrangement that anyone can set up. Assets (e.g. investments) are held by a trustee (e.g. a parent or grandparent) for the benefit of a beneficiary (e.g. a child). There’s no limit on what or how much can be put into a bare trust (from an investment perspective). The child becomes entitled to the assets in the trust when they turn 18. However, the trustees can make withdrawals at any time as long as they are for the child’s benefit – such as paying school fees.
A benefit of a bare trust is that the assets are taxed as if they are the child’s. However in most cases the income or gains fall within personal allowances and exemptions and there is no tax to pay. There is also no CGT to pay when the child eventually takes ownership of the assets at age 18, as they are already the beneficial owner (unless they sell the investments).
The one exception to the rule concerns gifts put into trust by a parent. If the income from these exceeds £100 per year, it will be taxed at the parent’s marginal rate and the parent will have to declare it on their own Self-Assessment tax return. This income may still be tax-free if it falls within the £5,000 dividend allowance. Alternatively parents may prefer to invest in growth funds with no or a low yield.