The last Independent Schools Council’s census found that annual school fees in 2020 rose to, on average, £15,000 per child. This means the average cost to parents of sending a single child to an independent school – if that child attends from age six to sixteen – could exceed £150,000 after inflation. For parents with three children, the cost could be close to £500,000.
With the pandemic gradually stabilising, parents can be more confident in taking advice on their estate planning and providing for their children over the long-term. Many parents will have earmarked funds to cover the cost of their children’s education (an “Education Fund”). However, not all parents will have thought about whether the Education Fund is managed in a tax efficient manner. In many cases the Education Fund will simply be mixed in with the parents’ own funds. This means:
- if the parents want to invest the Education Fund, they will only have their own capital gains tax (“CGT”) allowances to offset the gains they realise; and
- if one or both parents die whilst the children are still in education, the Education Fund may be subject to inheritance tax (“IHT”) in the deceased parent’s estate.
This is where an education trust can assist.
From an IHT perspective, if parents gift the Education Fund into trust then provided the amount gifted is reasonable for the child’s education needs, the gift will be treated as exempt and there is no seven year survivorship period. The value of the Education Fund, including any growth, will be outside of the parents’ estate and not subject to IHT.
From a CGT perspective, if the trust is set up as a “bare” trust, the parents can utilise the children’s CGT allowances, making it easier to manage the CGT position.
Finally, and perhaps most importantly, the parents can appoint themselves as trustees and so can remain fully in control of the Education Fund.
We would be pleased to speak to clients wishing to consider this planning option in more detail.