Planning for private school funding in the UK: Trusts, investments and tax efficiency
For families considering private education in the UK, the costs can be substantial. School fees continue to rise, with tuition at top independent schools often exceeding £40,000 per year and in some cases costing in excess of £50,000 per year.
Beyond tuition, additional expenses such as uniforms, extracurricular activities, school trips, and transportation can further increase the financial burden. Given these significant costs, careful financial planning is essential to ensure a structured and sustainable approach to funding a child’s education.
The role of trusts
One of the most effective ways to plan for private school fees is through the use of trusts. Setting up an education trust can provide a structured and tax-efficient method of allocating funds for school fees while maintaining control over asset distribution. Trusts can offer asset protection, ensuring that funds are used exclusively for educational purposes, and may provide tax advantages depending on the structure and jurisdiction.
Where appropriate, considerations will be made about the use of discretionary trusts, which allow trustees flexibility in distributing funds, or bare trusts, where the child becomes the outright beneficiary at the age of majority. Grandparents frequently contribute to education trusts as part of their estate planning, making use of inheritance tax exemptions to transfer wealth efficiently across generations.
Maximising allowances
Rather than relying solely on traditional savings, families can explore investment vehicles that offer both growth potential and liquidity, which means that in certain cases, and if absolutely necessary, money would be available to be withdrawn in the case of an emergency.
Stocks and shares ISAs, for example, provide a tax-efficient way to invest, as returns are free from capital gains tax and income tax.
Parents or grandparents can contribute up to the annual ISA allowance, currently £20,000, helping to build a substantial education fund over time. Additionally, junior ISAs allow for tax-free savings and investment growth, although funds remain locked until the child turns 18. For those looking for more flexible investment options, taxable investment portfolios or dividend-paying stocks can generate passive income to cover school fees. Careful portfolio construction, balancing risk and return, can help ensure that sufficient funds are available when needed.
Tax-efficient strategies are crucial for mitigating the financial impact of private school fees. Many families use gifting allowances to transfer wealth tax-efficiently. In the UK, individuals can give up to £3,000 annually per recipient without incurring inheritance tax, and larger sums can be gifted if the donor survives for seven years beyond the gift.
Grandparents and other relatives can use this exemption to contribute to education costs without impacting their own financial planning.
Another approach is to establish a family investment company, which allows assets to be managed tax-efficiently while keeping control within the family. This can be particularly beneficial for high-net-worth individuals who wish to ring-fence assets for education funding while mitigating inheritance tax exposure.
Leaving a legacy for your family
Estate planning plays a significant role in private school funding. By incorporating school fee planning into your broader estate strategies, educational expenses can be met without disrupting long-term wealth preservation goals for beneficiaries.
Your financial adviser can help structure a suitable estate plan that takes a holistic view of your goals and the goals of your beneficiaries, using and appropriate strategy tailored to you. This may include gifts, trusts, and investment vehicles, that align with tax regulations while optimising financial outcomes.
Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
The Financial Conduct Authority does not regulate Trusts, Inheritance Tax and Estate Planning.