Private school fees planning

It is assumed by many this will not be the case as Chancellor Rachel Reeves said the VAT on school fees would not be charged retrospectively, but in the article, tax expert Daphne Hemingway, who is a VAT director at accountancy firm Jerroms Miller, has said these fees may be subject to VAT ‘due to nuances in tax point rules’.

She said, “If school contracts are ineffective — and I’ve seen many that are — then the point at which VAT is chargeable, is the date the services are performed.” This essentially means that VAT may be chargeable on all prepayments regardless of when legislation is enacted.

As a result, while some may opt against private education, others are likely to seek advice to consider what options they have when it comes to school fees planning.

A Junior ISA could be considered as a way of building a tax efficient fund to help with costs of higher education although the child will have full access at age 18. Payments into the account will still be gifts for inheritance tax (IHT) unless fully covered by the annual £3,000 IHT exemption and or the normal expenditure out of income exemption. Gifts which aren’t covered by an IHT exemption will generally fall out of account once the donor has survived for at least seven years from the date of making the gift.

Other options could include unit trust/OEIC investments and/or investment bonds.

Unit trust/OEIC investments can be held in a trust (either absolute or discretionary). Where an absolute trust is used, clients have the opportunity to use the ultimate beneficiary’s personal allowance (up to £12,570 against any income generated in the trust) and, if units are encashed within the trust giving a CGT liability, the £3,000 annual CGT exemption. However, special rules apply if the trust is settled by a parent for their unmarried minor child – otherwise known as, the parental settlement provisions. This broadly means that, any income generated over £100 per annum will be taxable on the parent instead of the child. Capital gains would still be taxed on the child. From an IHT perspective the assets held in the trust would belong to the beneficiary and thus be included in their estate.

 

An investment bond (either onshore or offshore) can be settled into trust. If it is held within an absolute trust, unless the parental settlement provisions apply, any chargeable event gain that is generated through the lifetime of that trust will be taxable on the ultimate beneficiary in accordance with their rates of tax, subject to top-slicing relief if applicable.

 

Where the trust asset is an offshore bond, no tax is deemed to have been deducted within the fund so for example, if funds are needed, it is possible for a chargeable event gain of up to £18,570 to be shifted to that beneficiary without them having to pay any additional tax - so essentially, tax-free.

 

That figure is made up of:

                                                                                                                               
Personal allowance: £12,570

Savings allowance: £5,000 (only available if the beneficiary’s other income is below £17,570)

Personal savings allowance: £1,000

Total: £18,570

In cases where a client wishes to have more control in terms of destination of trust assets, a discretionary trust is often the favourable option. Even though the tax treatment of the trust and administration is more complex, the trustees will have more control and flexibility. For example, they can make an appointment of capital and assign segments/bond to a beneficiary for them to encash and use their personal allowances against any chargeable event gain.

The options for using the tax allowances of the beneficiary can be very advantageous, particularly where those individuals have no other income/gains aside from that which is generated by the investments. 

Remember a parent using their assets/investments to directly pay for private school fees is not deemed to be a gift for IHT purposes however, the same rules don’t apply to gifts made by grandparents.