Many parents and grandparents value the standard of education offered by independent schools and will pay for that privilege. Even if children do not go to an independent school, they may well go to university. Planning for these costs can help avoid the burden of a sizeable student loan.
The average fee for a boarding school is £10,317 a term (£30,951 a year) but if the child does not board and attends daily it is £5,827 a term (£17,481 a year). For a child attending a day school, the average fee is £4,313 a term (£12,939 a year). In addition, fees have increased considerably over the years and they increased by 3.5% on average last year (Source: Independent Schools Council, annual census 2016). The overall cost could exceed £300,000 – and that is just for one child. Without planning ahead the cost would be a drain on earned income or lead to a need for borrowing. In some cases the grandparents can help out and this can be very tax efficient.
In this post, we consider how an ‘offshore investment bond’ can be used to effectively fund education costs.
Tony and Jane are both higher rate taxpayers and wish to make provision for the private education of their grandson, Joshua. He is going to a very reasonably priced school as a day pupil and annual fees are currently £10,000. Josh starts secondary school in five years’ time and will continue there for seven years until he is age 18.
Tony and Jane invest £100,000 in an international investment bond, which is divided into 1,000 individual segments of £100. But then they transfer the bond into an absolute (bare) trust; with Josh as the beneficiary and his parents, Mark and Alison, as co-trustees. This is to ensure continuity if anything happens to Tony and Jane.
When fees become payable the trustees surrender individual segments. Now, as the bond is under a bare trust the gain is assessed on Josh who is a non-taxpayer, being a schoolboy without any earnings or investment income. The gain is offset against his personal allowance – which is currently £11,000, but presumably will be higher in five years’ time. He also has his £5,000 starting rate for savings income band and the £1,000 personal savings allowance, both of which can be used to mop up offshore investment bond chargeable gains.
At age 18, Josh will be entitled to the remaining segments in the trust fund (if any) and can use them for his own purposes. He could then put them towards the cost of going to university, for example.
Funding university costs
The strategy of using an offshore investment bond and washing out the chargeable gains using the student’s available allowances can also work perfectly well for funding the costs of university.
The expected cost of school fees can be frightening, but with effective financial planning it can be met tax efficiently. The use of trusts and the tax profile of offshore investment bonds can be very useful in this regard.