Cutting the cost of School Fees, it's child's play!

Grandparents fund a high percentage of school fee schemes. However a lot of the time they don't have the capital to set aside the large amounts required, so what are your options?

Taxed!

If the school is charging £10,000 in fees then you will actually be required to pay £16,667 of your earned income, due to the fact that after tax at 40% this leaves £10,000 to the school. Within ten years you will have paid £166,670 per child of your gross earned income over the course of their education.

Tax Avoidance!

If the parent sets up a trust fund on their own child then while ever the child is below 18 it will be taxed on the parent. However if another relation sets up the trust the parent will not be taxed on the trust income or gains. The most common candidate is a grandparent. If the grandparent is wealthy enough they can just place a large sum of money into trust so that the income and capital is available to pay school fees over the duration of the child's schooling.

It doesn't have to be taxing...

As long as the grandparent have excluded themselves from benefiting from the trust then the money is treated as if it were the child's income and no that of the grandparents. So about £36,000 per annum (the child's personal allowances and lower-rate bands) is available to shelter from a higher tax rate.

Be Wary!

Quite often the grandparents lack the capital yet the parents have it. The taxman will easily trace the money back to the parents if they simply give it to the grandparents and so ignores the extra stages added for a non-commercial way to avoid tax. If a gift of shares were given to the grandparents it would be attacked under the settlements legislation.

Shares

If the parents own a company that is lightly to generate enough cash to pay or the school fees of the child then there a couple of things to do,

Firstly, The grandparent must use his own funds to subscribe for shares in the parent's company. A separate rate of dividend can be paid without affecting dividends paid to the parents as these shares are issued in a different class from those held by the parents. Dividends can be high in relation to the amount invested and still though as completely commercial when investing in a small private company, this is because it is regarded as intrinsically risky.

Secondly, The grandparent must gift the shares into a trust that will help pay the school fees as soon as possible; the company may now pay dividends into the trust fund. As long as the gift is made within a short amount of time and the grandparent pays full market value for the shares then there will be no Capital Gains Tax due on the gift to the trust.

Safe, for the moment...

For the moment the taxman doesn't seem to be attacking these situations even when the grandparents payment for the shares was nominal in relation to the income arising. But with the ever-changing ways of tax avoidance, who knows how long it'll last...

Remember!

The main point is to make the arrangements commercial. This way you will only end up paying around £100,000, that's a saving of about £66,670 during the course of the child's schooling.