Zoe van der Linden, 40, never thought she’d send her daughter to a private school. But that all changed once Eva, who is seven, reached school age.
“Putting her in private school goes against how I feel,” said Zoe. “I think everyone should have access to the same education. However, I started to wonder if she is achieving her full potential where she is. She is showing as being very adept academically. The state schools that will develop her in the best way aren’t available to us as they aren’t close enough.”
Eva, who is currently in state school, started showing strong academic ability, said Zoe. So much so her and her husband, Hugh, decided to investigate the possibility of sending their daughter to private school. However, cost was an issue.
Although they are both in jobs with good incomes – she works as a senior manager at a fintech firm and he as a financial planner – it will still too much of a stretch. The conversation turned to whether her mother, Helen, would be able to pay instead.
“My husband and I went to my mum about paying for education,” she said. “It was something she was prepared for as the money she has put by was expected to be used for education – whether that be university or otherwise.”
Zoe and Helen, who is retired, are not the only ones considering making this move.
More grandparents are now covering the cost of school fees for their grandchildren as parents struggle with the rising costs of private schools along with the general increase in costs thanks to inflation.
To see if sending her child to private school was an option, Zoe went to her financial adviser at wealth planner Old Mill, initially thinking she would fund the school fees through her and her partner’s income.
While there is currently enough surplus from their salaries to cover the cost, she was concerned about job security and the potential disruption of having to change schools if she and/or her husband were to go through a period of unemployment.
In 2022-23, average fees in the UK were £15,655 per year for day pupils, and about £37,000 for boarders.
But while parents may want to help their children, there can be tax implications.
He said: “We have seen an increase in affluent grandparents now offering some financial support to parents, if appropriate,” said Jonathan Orchard, a chartered financial planner who advised Helen and Zoe.
“This method of providing support, while clearly welcome, can have unintended tax implications and so needs to be thought through very carefully. There is also the opportunity for grandparents to use their generosity to reduce their personal tax burden.”
In Helen’s case, he suggested the best way to give the money to Zoe would be to set up a family trust.
A trust is a legal arrangement where a person can gift money for the benefit of another person or group of people. The trust funds are usually controlled by a trustee (of which the person who gifted the money can be one), and they have the responsibility to act in the best interest of the beneficiaries.
A trust continues to protect the persons assets after death or in the event that they lose capacity to manage their own affairs.
In this scenario, Helen, 73, would make a trust to gift money to Zoe to spend on private education.
Helen, who is retired, has savings that are invested. She also has a self-invested personal pension, more commonly known as SIPP, which she hasn’t yet spent, and has earmarked to pass on to her grandchildren.
She has already withdrawn money from her pension that will go towards her granddaughters education.
Orchard added: “This lump sum, along with some further funds, was gifted into a family trust for the main benefit of Eva, to secure her private education costs, regardless of any change in the parents’ circumstances.”
If Helen lives for seven years, to 80, the gift of the money will be outside of her estate and will not be subject to inheritance tax.
Currently, inheritance tax is charged at 40 per cent for properties worth more than £325,000 with an extra £175,000 allowance if the main residence is passed to children or grandchildren. No inheritance tax is due on gifts if you live for seven years after giving them. If you do die within three years of giving them, the gifts could be liable for the full inheritance tax rate of 40 per cent.
The payments out of the trust to fund the school fees will be taxable against Eva instead.
Zoe says it is likely, if she decides to go forwards with a private education, that her mother will end up paying for the whole time, which could be until Year 13, before university.
She said: “How much it will cost in total will depend. On the lower end, private schools can start at £10,000 but go up to £20,000 a year depending on the term. Depending on my husband and I’s earning potential, which will hopefully go up over time, will depend on where Eva may go and for how long.”
This could work out at a cost of potentially upwards of £200,000 if goes to a more expensive school and stays in education until she is 18.
Zoe and her husband have not yet decided on a school for their daughter so do not know the full cost but, if they do find one, will follow Orchard’s advice and take the money from the trust.
Is a family trust the best way to pay for private school fees?
Jonathan says one of the best ways for grandparents to pay for school fees is via a family Trust. These trusts can provide a secure and efficient way to plan for school fees, offering tax benefits, asset protection, flexibility, and long-term continuity.
- Tax Advantages: By transferring assets into a trust it is possible to significantly reduce inheritance tax, income tax and capital gains tax. This could be £100,000’s in tax potentially. This can naturally ensure more funds are available to pay for the fees
- Flexibility: Trusts offer flexibility in terms of distribution of funds. They can be structured to allow for periodic distributions or to provide for specific educational expenses, such as school fees, school trips and university costs. Trustees have the discretion to decide when and how funds are distributed.
- Asset protection: Assets held in a trust are protected from creditors and can be ring-fenced from divorce settlements. This can ensure funds earmarked for school fees are safeguarded and not subject to potential financial complications.
- Continuity: Trusts can ensure even in the event of changes in personal circumstances, school fees can be paid. For example, if the parent or grandparent paying the fees passes away or becomes incapacitated the trust can continue to provide for the child’s education.
- Educational legacy: Parents or grandparents can create a lasting legacy of education for future family generations. Trusts can be structured in a way that allows for continued funding of education expenses for descendants, ensuring that the family’s commitment to education is preserved.
- Long-term planning: It can allow family members to “set-aside” for school fees well in advance. This can help alleviate financial pressure when the time comes to pay for educational expenses.