Labour’s private school tax increase, strategies to consider for managing costs

Private education is a priority for many seeking the best start in life for their children or grandchildren.

According to University College London, private school pupils do “significantly better” at A-levels than those in similar state schools.

As for prospects of higher education, the ISC’s census shows that the majority of ISC school leavers continue to higher education. Of these individuals:

• 58% continue to a “Top 25” UK university – including Exeter, Durham, UCL (University College London), and Edinburgh
• 4% continue to Oxford or Cambridge
• 19% take up university places at institutions ranked 26th to 50th in the UK

Beyond higher education, research published in the Guardian in 2016 by educational charity The Sutton Trust, goes a long way in showing the benefits of a private education for career prospects.

Despite just 7% of the population attending fee-paying schools, privately educated pupils accounted for:

• 71% of top military officers
• 74% of top judges working in the high courts and appeals court
• 61% of the country’s top doctors
• 51% of leading print journalists
• 32% of MPs

However, private school fees are notoriously expensive, with the BBC stating that the average annual cost in the UK is around £15,000.

LABOUR’S PRIVATE SCHOOL FEE PLEDGE- A 20% VAT TAX INCREASE

If Labour comes into power following the July 4th UK General Election, one of its key policies is to apply a 20% VAT rate on private schools, significantly increasing the existing cost of school fees.

Labour state that revenue generated by the 20% VAT rate shall be invested into hiring 6,500 new teachers as well as into educational reforms like increased teacher training, Ofsted reform, work experience and career advice for young people, and increased mental health support.

In light of this potential change, you might be exploring ways to manage the school fees you currently pay.

CONSIDER PRE-PAYING A YEAR’S WORTH OF SCHOOL FEES IN ADVANCE

One emerging strategy worth assessing involves pre-paying a years’ worth of school fees in advance, before the time of the election, to avoid the 20% VAT tax increase for the following year.

Fortunately, many private schools offer discounts if you pay for an entire year upfront. While this may only be 1-2%, that would make a significant difference if the fees you pay are on the higher end of the price scale.

When considering an advanced payment, also ensure to check whether pre-paying for multiple children may yield further savings- many private schools offer discounts for multiple enrolment.

CONSIDER ONLY PAYING FOR “CORE” SCHOOL YEARS

Sending your child to private school from age five can be very costly. Private education might be most valuable during crucial exam years like GCSEs or A-levels.

Instead of paying for private education throughout, consider sending your child to a state primary school and possibly a state secondary school until age 14, when they start critical exams.

Alternatively, if you live in an area with selective schools, you could do the reverse. For example, in areas with grammar schools, you might pay for private education until your child can attend a grammar secondary school.

Of course, you will need to factor in your child or grandchild’s transition from one school to another if you seek to employ this method.

REMEMBER TO SHOP AROUND SCHOOLS

Private school fees vary significantly by region. According to the ISC Census and Annual Report 2023, the average termly non-boarding day fees in London are £6,676, while in the north-west, it’s £4,023.

If you’re open to schools further afield, compare local fees to find a more affordable option. The type of school also impacts costs – full boarding schools are pricier than day schools.

Consider what type of school best suits your child to manage costs effectively, rather than opting for the most expensive option thinking it’s the ‘best.’

LOOK FOR SCHOLARSHIPS AND BURSARIES TO REDUCE THE COST

Many private schools offer scholarships and bursaries. Scholarships may be available for talents in sports, music, drama, art, or academic excellence. Bursaries might also be offered to students from specific areas.

Bear in mind that bursaries are often means-tested, but eligibility criteria can vary. Some schools may consider educational attainment over income or assets. Ensure to check with each school to understand their specific offerings and rules.

SAVE AND INVEST FROM THE DAY YOUR CHILD IS BORN

Whether you use the options above or not, it is wise to save and invest for your child or grandchild’s education from birth. Setting aside money specifically for this purpose can help cover rising fees in secondary school and sixth form.

Crucially, investing from birth to age 14 or 16 provides a longer time frame for growth, potentially increasing your investment’s value. According to the Financial Conduct Authority – the financial regulator in the UK – a five-year investment period helps ride out short-term market dips, but investing longer offers even more growth potential.

Note that a Junior ISA (JISA) isn’t suitable for education savings, as funds can’t be accessed until age 18.

EXPLORE HOW PAYING SCHOOL FEES CAN HAVE INHERITANCE TAX ADVANTAGES

Paying school fees for a child or grandchild not only shows care but can also yield significant Inheritance Tax (IHT) benefits.

When calculating the size of your estate, certain gifts that exceed any gifting allowances you have may be excluded from the calculation, depending on the specific circumstances of the gift.

Crucially, this can include gifts that you regularly make from your income. That means, if you pay for school fees – a regular payment that you can prove you have consistently made over time – then this value may be excluded when calculating your estate on your death.

There are some rules to bear in mind when doing this:

• The gift must come directly from your income
• The gift must be regular
• You must not gift money you need to live your lifestyle.

So, while the upfront costs of school fees are high, paying them with money you don’t need to live your lifestyle could ultimately reduce the size of your estate and, as a result, a portion of an IHT bill.

GRANDPARENTS- EXPLORE HOW PAYING SCHOOL FEES THROUGH A TRUST FUND CAN HAVE INHERITANCE TAX BENEFITS

Setting up a trust fund to pay for your grandchild’s private school fees can be a further tax-efficient method to manage educational costs and help with inheritance tax (IHT) planning.

The main benefit of a trust fund is that, as a trustee, you stay in control of the trust assets. Simultaneously, you can use your grandchild’s tax allowances, whilst helping you reduce the amount your estate might owe in inheritance tax.

For example, grandparents can set up a trust with their assets. Once the assets are in the trust, the person who gave them (the settlor) can’t access them anymore. Creating a trust usually means transferring assets like company shares, investments, or cash, often without having to pay capital gains tax, especially for shares in a trading business.

However, please be aware that capital gains tax may still apply on either the disposing of assets to place cash in-trust or the gifting of assets in-specie into trust, unless holdover relief can be used to defer.

“When a grandchild is born, a good adviser sees a tax code, while grandparents see a bundle of love.”

Talk to an expert to find out more.

GET IN TOUCH

Want to find out more about organising your wealth so you can support your loved ones? We can help at Rosebridge, please get in touch. 

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PLEASE NOTE

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate Tax, Trusts and Estate Planning.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.