Summer signals that time when you might be thinking about private education for the next school year – it’s a question that I’m asked frequently.
On average private school fees sit at around £12,000 per year, so if you are a higher rate taxpayer you’d need to effectively earn a salary of £20,000; a significant amount of money.
Should you take it as dividends from the company?
The simple answer to this is no. If you’re a higher rate taxpayer and take the £12,000 as dividends, the total dividends to be paid would be £17,788 with income tax. Let’s not forget that the company will also pay 19% on its profits before distributing the dividend to you.
Can you fund it through income generating assets?
With this approach, any income which is generated from these assets and passed from parent to child is taxed as though the income was generated from the parent. It can, therefore, be a costly route.
So, what’s the best way to fund private education?
Grandparents can gift assets into a trust and any income which is generated by the assets can be passed on to the children without it affecting the parent’s tax position. For a family business, this is an ideal scenario. The grandparents’ shares are put into the trust; the beneficiaries will be the grandchildren and the dividend income from these shares can then be used to pay for private education.
A trust also protects the assets from divorce or bankruptcy should this happen to a beneficiary. The overarching benefit of a trust is its flexibility, it can be as wide-reaching as you or the grandparents wish. You could, for example, instruct that the income should be split equally or decide annually who receives what.