Anna Murdock: How school fees could pay for themselves

While the cost of a private education may be prohibitive to many, Anna Murdock explores how wealthy grandparents can using lifetime gifting to benefit the next generation and avoid hefty IHT bills

As we progress through our second lockdown, family objectives are changing. The pandemic has disrupted lives to a point where saving patterns, spending patterns, livelihoods and motivations will have shifted.

Childcare lockdown issues and the flaws in the education system have been a well-trodden feature in the media that appears to have blighted the daily lives of many families. As such, there are reports of more people sending their children to private schools as they coped better with remote learning during the first wave of the pandemic.

Anxieties over their children “falling behind” private school pupils and growing fears about the threat of further disruption to state education next year have been cited as key reasons for this new trend, and recent research from University College London seemed to confirm as much, showing gaps in the provision of online lessons and meetings were particularly pronounced between private and state schools during the crises.

The thought of private schooling is certainly not expected to be a top priority, or a reality for many families, especially those trying to keep their head above high water. Yes, ‘value for money’ is not something people often associate with education, preferring to see it as something unsullied by market forces, and of course because of the expense. But it might just be the case here. As in many other areas, it can be a powerful tool for pushing up and maintaining high standards, as well as giving parents some peace of mind about their children’s development particularly during a time like this.

But with the cost prohibitive for many families – the Independent Schools Council (ISC) census of 2019 put it at around £9,000 per year on average – independent schooling can only be thought of as ‘valuable’ once you consider how generational transfers can help you meet this objective cost-efficiently.

As family estates have increased, so to have the Inheritance Tax (IHT) receipts being received by the Treasury.  Some grandparents have estates worth more than the government’s IHT threshold (£325,000) and huge swathes of their estates are in danger of being gobbled up by the taxman, making generational transfer even more costly for those even with relatively modest estates.

Our ‘Wealth across generations study’  study found that many grandparents are not large spenders; perhaps as a result of their waste-not, want-not mentality. Therefore for those with wealthier grandparents, lifetime gifts such as school fees are an effective way for grandparents to reduce the value of their estate during their lifetime, while also simultaneously providing for their loved ones, in this case their grandchildren.

Grandparents can utilise the annual exemption of (max £3,000) and pay up to this amount each year towards their grandchildren’s education, and/or alternatively go above and beyond this and make regular school fee payments from their income. Such regular gifts can be immediately exempt for IHT purposes provided they come from surplus income and do not negatively impact on their normal standard of living.

Gifts of capital through the creation of lifetime trusts for grandchildren is another tax-efficient way to contribute to your grandchild’s education, while also retaining some level of control over how the capital is distributed (and importantly shielding it away from the taxman). These gifts would be outside of the estate after seven years.

Cash-strapped parents keen to secure a private education for their children during these strained times could be the biggest winners in this scenario through having more disposable income as a result of needing to pay less in school fees, or nothing at all, while Grandparents get the peace of mind that all their hard work is being used by their kin, and not by Her Majesty’s Revenue’s and Custom’s (HMRC). 

During a time like this, the cost of an independent education could pay dividends for families, and it’s one that Financial Planners should be putting on the table for those concerned parents.

Anna Murdock is head of wealth planning at JM Finn