The cost of private education
The cost of sending a child to a private school in Scotland has historically risen at a higher rate than general inflation with increases of 6% per annum not uncommon. This has eased recently though with a 3%-4% rise being common in 2015/16. As a rule of thumb we would generally factor in rises of around 3% above inflation on an annual basis.
The cost of a "non-boarding" primary education in Scotland's private schools ranges from around £7,000.-£10,000 per annum rising to £11,000-£12,500 for secondary education. This can rise to upwards of £30,000 p.a. for secondary pupils who board at some of Scotland's more expensive schools.
Ignoring inflation then, this means that the financial outlay for a parent who wishes to send their child to school from primary 1 right through to the end of senior school, would start at around £115,000. When you then take into account the additional costs (uniforms, trips etc.) you might be looking at upwards of £150,000. This can easily be doubled for parents who wish to send their children to boarding schools.
There is unfortunately no magic solution to this and the answer is often a combination of setting funds aside to fund this; paying as you go along; or raising funds from other assets to cover it.
If none of these ongoing funding options are possible, some people will look at remortgaging their house or may ask their parents to help them with the fees.
Although many grandparents leave money in their wills for their grandchildren this means that they never get to see the benefit it has for their family. It also means that the funds still form part of their estate for Inheritance Tax, whereas they could have fallen out of their chargeable estate if the gifts were within their annual allowances (£3,000 p.a. per person) or made more than 7 years before they die. In some cases however, gifting funds on an ongoing basis to cover school fees can be an expensive business for grandparents with growing families. This also means that they lose control of any funds gifted away, which in some cases is not ideal.
Many grandparents are not keen to gift the funds directly to their grandchildren but there are various options they can investigate, including simple trusts, which can ensure that they retain control of any gifts. These trusts can also be set up to ensure that any future grandchildren can also benefit.
Types of investment
In the past there were products which were badged as "school fees plans". These were simply endowment style policies with set maturity dates, and very few performed as the investor had hoped. They are rarely used now.
Anyone who is thinking of earmarking funds for their children's' school fees should start with the most tax efficient options. The key is to ensure that you are taking full advantage of the annual ISA allowance (currently £15,240 per person p.a. but rising to £20,000 p.a. in the next tax year); that you are making use of the £5,000 per person annual dividend allowance; and the annual Capital Gain Tax allowance. Using a combination of the above, a couple can invest £250,000 to £300,000 with little or no tax payable.
Offshore bonds are also a viable option for higher earners as withdrawals of up to 5% of the initial investment can be taken each year, with sections of the bond being assigned to the child from age 18 (or potentially younger) to ensure that any gains are assessed on the child, and therefore take advantage of the child’s Income Tax allowances.
As mentioned previously there is no magic answer to funding school fees. The key for most parents is to ensure that they either have a sufficient lump sum or income to fund the school fees before they embark on this route rather than finding it is unaffordable and being worried about having to disrupt the child's schooling at some point in the future.
In order to do this I would always suggest running a cash-flow plan to ensure that the fees are affordable in the first place, and also checking the "worst case scenarios" (such as long term sickness or unemployment) to ensure there is a fallback position. In some cases this fallback may be in the form of accessible funds or in some cases it may involve an insurance solution.
We can give you advice on the investment options; the tax efficient structures; and also look at cash flow projections. We aim to provide our clients with the best planning options, to ensure they can meet their objectives, and give them peace of mind that they are setting off on the right course.