Paying private school fees: Tax Strategies

It’s natural to look for ways to pay your child’s private school fees in a tax-efficient manner. According to the latest figures, a parent with one child in private school will pay approximately £350,000 for their private education. This means you need to earn around £600,000 to cover these expenses due to the high tax rates on income. However, there are ways to pay school fees more efficiently by utilizing tax provisions.   1. Using Trusts to Pay School Fees Trusts can be a powerful tool for managing family wealth and ensuring funds are used for specific purposes, such as paying for children’s tuition fees. One effective strategy involves transferring shares into a trust and using the dividends generated to pay the children. This method can be particularly tax-efficient when set up by grandparents or other relatives, rather than parents. Why Parents Can’t Use This Strategy: Under UK tax law, specifically ITTOIA 2005 S629, if parents set up a trust for their minor children (under 18), any income generated by the trust is treated as the parents’ income for tax purposes. This rule is designed to prevent parents from diverting income to their children to benefit from lower tax rates. However, this restriction does not apply if the trust is set up by grandparents or other relatives. Setting Up a Trust with Shares: As parents are prevented by legislation from using certain tax-efficient strategies, shares need to be transferred by another relative, such as grandparents or any other relative. A Bare Trust is set up, and the shares are transferred into that trust, with the children holding the beneficiary status. The income generated by the shares can then be transferred to the children, who can receive up to £12,570 tax-free. Even if the tuition fees exceed £12,570, any additional amount is still taxed at only 20%, making this a highly efficient way to manage educational expenses. Using Trust Income to Pay Tuition Fees: Direct Payment: The trustees can pay the school fees directly to the educational institution. Distribution to Beneficiary: The trustees can distribute the income to the beneficiary, who then uses it to pay the fees.   2. Family-Owned Businesses Another strategy involves adding children as shareholders in a family-owned business and paying them dividends. This can be tax-efficient if the children are lower-rate taxpayers. Key Points: Age of Children: If the children are under 18, the dividends may still be taxed at the parents’ rate due to the settlement legislation. However, if the children are over 18, they will be taxed on the dividends at their rate. Tax Efficiency: Dividends can be taxed at the child’s lower rate, making it a cost-effective way to manage school fees. Can I use it to pay university fees Yes! You can.   While this strategy can result in significant tax savings, it’s essential to take care to avoid unforeseen tax bills. Always consult with an accountant to ensure compliance with all regulations and to optimize the benefits of this approach. Book a free 15 min session with us to see how we can help you save taxes and manage your finances. Book a free 15 minutes discovery call with us today!