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Private education tax

If you have children already in private school education, or are planning to in the future, you may already know that this can be a big investment.

According to the latest studies, private schooling from primary age through to A-levels will cost £286,000 in total, £468,000 if they are boarding.

There are a few private education tax efficient ways that could lighten the burden of paying for school fees.

Start early

You would have to save approximately £15,000 per year from when your child is born to accumulate sufficient funds to cover their school fees, assuming a 3% return per annum.

A simple tax efficient solution is to make sure that you are using your annual ISA allowance whilst linking it to the stock market.

Help from the grandparents

Almost one in four children in private education are funded by their grandparents.

A trust can be set up for the benefit of your child or children where each grandparent can contribute up to a total of £3,000 per year (potentially £6,000 in the first year) without any inheritance tax consequences.  This is known as the annual gift exemption, assuming they make no other gifts.

The income generated by the trust is treated as the children’s own for tax purposes.  As we are all taxpayers from the day we are born, each child will have their own £11,500 personal allowance for income tax and £11,300 annual exemption for capital gains tax.

However, this doesn’t work for you as a parent.  Any income generated from funds that you contribute into the trust (assuming over £100) is taxed as if it still belonged to you and not your children.  This doesn’t apply to children if they are 18 years old or over though, which we’ve mentioned below.

Using the business

Dividends are the most tax efficient way to withdraw money from your company, however our advice is to avoid minor children owning shares in your company.

Instead your company could allot a distinct share classification, and let’s call them B shares for this article.  These shares would then be assigned to the grandparents or another family member.  The grandparents could then set up a trust for the benefit of their grandchildren, and gift the B shares into the trust.

If structured correctly, the money will be taxed in the hands of your children.  Their unused personal allowance and dividend allowance can be offset against this income resulting in little or no tax to pay.

The above is hugely simplified, so as ever, please talk to us before making any decisions as everyone’s circumstances are different.

If you have any questions about private education tax, please contact Michael Burgess or Rebecca Thorley on 01782 279615 who will be happy to help.