Have you more grandchildren (or great-grandchildren) than before the pandemic? If so, you are not alone!
According to The Institute for Family Studies (IFS), the Covid-19 pandemic could boost the number of births by up to 40 per cent by 2024. Supporting academic research suggest that this is due to various factors including:
- historical examples of birth rates rising after national crises
- loss of family and friends prompting ‘mortality replacement’
- deferred IVF treatments during the various lockdowns
In addition, the so-called isolation economy of 2020 has boosted expenditure by those not adversely affected by the pandemic, as a report by L&G revealed:
“An additional £191 million per week is being spent by individuals with steady jobs or stable or improved self-employment income compared to normal.”
The effect on school fees
So, what has all this got to do with school fees? Quite a lot.
If there are more children and more people with income to spend on private education, the demand for places at the best private schools will rise.
At the same time, many private schools have increased their fees. According to an article in The Times
“Despite two years of disrupted schooling, fees have jumped as much as 6.5 per cent compared with the last academic year — more than double the 2.4 per cent inflation rate.”
So, by the time your new grandchildren are at the age their parents wish them to attend private school, it could be both competitive and expensive. The last thing parents would want is to finally secure the ideal school for their children - and then not be able to afford it.
Private school fees: the bottom line
Putting a child/children through the private school, system is a long-term commitment. Parents will spend a very substantial amount of money each and every year until the last child reaches the age of 18. And that’s before university fees too.
According to the Good Schools Guide:
“A family whose child starts school (in reception) in 2022 at the expensive end of the market in London will be looking at an eye watering bill close to £470,000 by the time that child has finished their A levels. A school which prices itself at the UK average will be considerably less, but at £270,000 it’s still a major investment.“
At the time of writing, fees for Eton College were £14,698 per term, excluding Initial Registration, and Acceptance Fees, and before any extras. The Guardian recently reported that spending per pupil was more than 90% higher in private schools than state schools.
The bank of grandpa and grandma
If you wish to help the next generations attend a private school, you can start to help now, when they are still little. As the Financial Times Advisor website suggests:
“Setting up a trust may be ideal for those parents or grandparents who may wish to save money over a period of time to fund these expenses or if they wish to transfer a lump sum as part of their estate planning.”
Why set up a Trust at all?
A Trust ring fences the money for the sole purpose that it is intended for. If parents set up a Trust, it will be subject to stringent anti-avoidance provisions. As the FT Advisor article says:
“To circumvent this, it is quite common for grandparents to set up a trust for the benefit of their grandchildren as the anti-avoidance provision does not apply to them. If the grandparents create a trust, then the income can be used to pay for their grandchildren’s school fees as well as their university costs.”
And it’s not just about the money, as an article at Ritchie Phillips says:
“With funds available to pay fees, you may also be able to take advantage of early payment school fee discounts and the massive burden of meeting those termly school fees or the daunting costs of university are met, bringing both peace of mind and giving your children or grandchildren the best start in life.“
Different types of Trust
In my previous blog on Trusts, I described two main types of Trust that are often used to provide for children’s school fees and/or university fees:
• Bare trust
• Discretionary trust
Each has their own tax consequences and beneficiary rights, but both will help “ring fence” money for school fees.
Interest in possession (IIP) Trust
This type of Trust passes on the net income from the Trust fund to the life tenants (beneficiaries) until a specified date, such as the end of full-time education. This type of Trust is quite complex and should only be set up after discussions with your financial advisor and/or estate planning professional.
Always get professional advice on Trusts
You should always consult your financial advisor before setting up any type of Trust, to ensure it is both affordable and tax efficient. It must also be set up carefully as the HMRC have anti-avoidance provisions to prevent monies are being diverted to a child Trust fund to avoid tax.
You should also discuss this with your estate planning advisor to ensure it fits within the overall portfolio of measures to ensure your estate passes to the people you want to benefit.
IHT and paying for school fees
The 7-year rule does apply to Trust payouts made during your lifetime and on your death. As website What Investment points out:
“When considering (these) trusts, it must be remembered that you are making a potentially exempt transfer if going down the bare trust route or a chargeable lifetime transfer if choosing a discretionary trust route. These both take seven years to fall outside of your estate for inheritance tax purposes and, therefore, if you are considering doing any other estate planning, care must be taken to ensure you follow the preferred order of gifting.“
Want to help out with school fees?
Consult your financial advisor for expert advice on the suitability of any form of Trusts. Panthera Estate Planning as a company cannot offer financial advice, but Paul Hammond can in a personal capacity as a regulated financial advisor.
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