Back to school, time to plan
With university costs now up to £9250 a year for tuition alone, and the cost of private education also rising, good financial planning is key to ensure that children receive the education that their families are hoping for.
In many cases, grandparents are happy to contribute to education costs for their grandchildren, and this can be a very effective way for families to pass down money through the generations, without incurring inheritance tax.
Here’s how families can get started.
Have the conversations
For families who want to plan for children’s education, starting early is key. The most recent figures from the Independent Schools Council (ISC) show that the average cost for private education rose 1.1 per cent last year, to £5,333 a term on average for senior day schools, and £11784 for senior boarding schools1.
Those can be daunting figures for families, but often grandparents want to help out, with studies indicating that around one in five private school students receive grandparental financial contributions2.
Talking about what might be available in future while a child is still young can help families to plan, while money can be invested so it grows into a nest egg that can be used for education later on.
Maximise tax efficiency
Gifting money to help with a grandchild’s education can be tax efficient, as well as rewarding in other ways.
Financial planners can help grandparents to structure their giving so that it does not attract inheritance tax, which might otherwise be payable on gifts to help with school fees.
Even if school fees are paid directly to a school by grandparents, they could count as part of a grandparent’s estate if they died fewer than seven years after payment, so it is important to use the exemptions available to ensure this is not the case.
These include making regular gifts out of income to pay fees, and carefully noting them down in case of HMRC challenge, as well as using annual gifting exemptions.
In some cases creating a trust fund for grandchildren will be the best way to ensure that financial gifts are used for the right purpose and are given in a tax-efficient way.
In some cases, grandparents might want to pay fees to a school in a lump sum early on to ensure that they receive a discount (many schools offer this if fees are paid upfront). However, if this is the strategy used it is important to ensure that you are happy with the school and that there are arrangements in place if the child’s time there does not work out as planned.
Time it right
If paying for education from 4 to 21 is too much, many families choose to concentrate their efforts on certain parts of the education system where they feel it may have the most impact.
This may be ‘state till eight’, followed by private education until 18, or state education until 11 in some cases. Other families may choose to privately educate at Sixth Form, or to pay for a prep school early on in hopes that the child might attend grammar school later.
Opting for private school later in life gives time for investments to grow if started earlier, whether grandparents put the money into the child’s name or not.
Another option is for grandparents to make plans to help with university costs. In this case, money can be put into the child’s own Junior Isa (JISA) which can hold £9,000 a year in contributions and grow free from tax.
However, it is worth noting that Junior ISA become the property of the child themselves when they turn 18, so there is a high degree of trust necessary with the use of these accounts.
However and whenever families choose to pay for education, planning in advance makes the whole process far easier, while sensible investment can help ensure there is enough in the pot to help children to reach their full potential.