Facts

THE DUNCAN LAWRIE DOWNLOAD

The facts about private education In this guide: n Facts and figures n The importance

of planning ahead

n Inheritance tax benefits – how grandparents can help

n Using trusts n Discounts,

scholarships and bursaries

n How to contact Duncan Lawrie

The cost of a private education is now eye-wateringly high Parents with three children who plan to send them to private school between the ages of 8 and 18 can expect this to cost well in excess of £500,000. In the peak years, when all three children are at school, parents could easily pay over £60,000 per year – a terrifying prospect for most people. In real terms, the average price of sending a child to private school is now nearly four times what it was in the 1970s, and has risen almost 65% in just the last 20 years*. Choosing a school where your child will be happy and well educated can be difficult even when you have plenty of money to spare. Every parent wants the best for their children, but for many, if that means giving them a private education, it can be a financial struggle, as a recent YouGov survey confirmed: n 3 2% of parents surveyed claimed that if cost were no issue they would send their children to private school n H  owever, when parents of children under school age, or those planning on having children, were asked to take cost into consideration, the figure falls to 10%; this shows that cost significantly deters parents from providing the education they would like to give their children. Why parents would prefer to go private Of those parents who would prefer to educate their children privately: n 8 1% felt it would provide a superior education n 6 4% thought a private school education would increase the chances that their child would go to university and therefore get a better job n 5 4% believed private schools would have better teachers n 5 2% said private schools would offer greater networking opportunities in later life n 1 7% believed their child would be less likely to get bullied. How parents fund private education for their children 24% of respondents with a child in private education told YouGov that their child has a school bursary or scholarship. Another 24% explained that the child’s grandparents pay the fees. However, 17% said they had been saving for many years to afford school fees. continued...

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Planning

Grandparents

The facts about private education (cont.) 30% prioritised education over pension contributions or other savings and investments. 46% said that if school fees became unmanageable they would cut back on holidays, while 21% would downsize their home and 39% would liquidate investments. However, with the right preparation and advice, it should be possible to educate your children privately and still enjoy family holidays, keep your home and maintain your pension plans.

How to give your children the best possible education Start planning early Unless you are one of the few lucky people who can afford school fees out of your income, or already have capital set aside for this purpose, it’s vital to start preparations as soon as possible. If you’re really serious about private education, you should begin saving when your child is born, or possibly even earlier, despite the other pressures on your finances at that time. Once you have already set aside and ‘ring-fenced’ the money for your children’s education, it is less likely to be affected if there are any negative changes in your family’s situation while your children are still at school. Take advantage of tax breaks If both parents use their full ISA allowance each year, by the time the child is eight years old your family could have a tax free investment pot of over £300,000** compared with £200,000 before the ISA allowance increase this year. You could use this in two ways: n T  o produce a tax-free income to boost your existing income when you start paying school fees n O  r simply to draw school fee payments from the pot. It might also be worth contributing to a Junior ISA (JISA) for each child. You can save £4,000 per annum into JISAs, which will become available to your children at the age of 18. The fund could then be used to pay university fees. **Assumes 5% pa investment growth. Back to contents page > Look into inheritance tax advantages for grandparents According to the YouGov survey, almost a quarter of parents with children in private school rely on grandparents to help fund the fees. In fact, school fees may represent a good opportunity for grandparents (i.e. your or your spouse’s parents) to indulge in some inheritance tax (IHT) planning. Making a contribution to your children’s fees will reduce the proportion of the grandparents’ estate that is potentially subject to 40% inheritance tax. n T  hey can each give up to £3,000 per year free of inheritance tax n If they also make regular school fee payments from their income, these will immediately be removed from their inheritance tax liability, provided the gift comes from surplus income and does not reduce their standard of living n If they make school fee payments as gifts from their capital, these would be regarded as a potentially exempt transfer (PET) and would be free from inheritance tax after seven years. Back to contents page >

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The facts about private education (cont.)

Trusts

Talk to grandparents about setting up a trust fund If there is a possibility that grandparents can offer a lump sum gift, you could look into setting up a trust for paying school fees, as there are substantial tax benefits. If you decide to do this, we recommend getting expert advice. As much as your parents may love their grandchildren, even with IHT advantages most people are not keen to give away their money without keeping some control over it. This is where a trust can be useful, as it allows people to ‘gift’ money to their chosen beneficiaries, say to grandchildren for their education, but retain some control. One of the advantages of grandparents lending a hand is that they can individually give up to £325,000, or £650,000 as a couple, under the ‘nil rate band’. This means that setting up a trust to pay school fees won’t involve an immediate tax bill, and as long as the grandparents are still alive in seven years’ time, the money will not be included in their estate for inheritance tax. Trusts can also be helpful if there are any difficulties between a child’s parents. Sadly, divorces are becoming more and more common – and your child’s education could be at risk in a matrimonial dispute unless the money for their school fees has already been gifted unconditionally or ring-fenced. A trust offers a formal and straightforward way to keep that money safe and make sure your intentions are clear. Once you have set up the trust, both the capital and the income are held by the trustees for the absolute benefit of the beneficiary (your child). Although the trustees are the legal owners of the trust assets, they have no beneficial interest, so the trust assets will not be treated as part of their estates for probate or tax purposes. Any gift into a trust will be out of the grandparents’ estate after seven years. Either discretionary or bare trusts (see the box below for a description) can be used for school fees planning. Whilst a discretionary trust can offer more flexibility, it is subject to tax at the trust rate (37.5% on dividends and 45% on income) which then has to be claimed back for the grandchildren. It might be simpler to use a bare trust, as the income is automatically taxed at the beneficiary’s tax rate. The grandchildren are unlikely to be UK tax payers, so a bare trust can take full advantage of their annual tax allowances for both income tax (currently £9,440) and capital gains tax (currently £10,900). The beneficiary of a bare trust becomes entitled to the trust’s assets at the age of 18 – although it is possible to design the trust so that school fees have reduced the trust assets to around zero by that stage. Also, discretionary or bare trusts for school fees planning are only suitable for gifts from grandparents, as gifts from parents don’t enjoy the same tax benefits.

A bare trust is a cost-effective, simple but relatively inflexible ‘holding trust’ in which assets are held for a child until their 18th birthday, when they become the sole owner of the assets. A discretionary trust is a more flexible trust, which gives the trustees the ‘discretion’ to decide how the money and assets in the trust are allocated and distributed. Back to contents page >

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The facts about private education (cont.)

Discounts

Explore discounts, scholarships and bursaries There are a number of different ways to reduce school fees. No matter how much you’ve put aside, it’s always worth checking whether you can qualify for a discount. For example: n L  ook into paying fees in advance: Many schools will offer a discount if you pay school fees in advance. The discount will typically be slightly more than the interest rate you could obtain from a savings account, especially in the current low interest rate environment, so if you are a low-risk investor this may be worth considering. n I nvestigate scholarships and bursaries: UK private schools currently grant around £620 million in fee assistance – two thirds in bursaries based on need, one third in scholarships won on merit*. Many private schools have charitable status, and the Charity Commission has encouraged a move away from scholarships towards bursaries, as this helps to make private education available to poorer families. o If your child has a particular talent, a scholarship could result in a substantial discount on the fees o Bursaries are discounts for families who genuinely cannot afford the full fees; the amount of discount will be based on a means test n A  sk about discounts for siblings: Schools may offer a reduction if you have more than one child attending the school; this can be as much as 10%. If you get into financial difficulties, be persistent and persuasive Discounts and bursaries become even more important if you get into financial difficulties at any stage of your child’s education. As soon as you think there might be a problem, go and talk to the Head Teacher. Ask about bursaries, discretionary fee reductions, restructuring fee payments over a longer period, or some kind of interim relief if you believe it is just a temporary problem. During the current economic situation, schools are receiving a great many of these requests, so you will need to be persistent, convincing and persuasive. However, don’t give up – your child’s future could depend on the continuity and standard of their education. Don’t underestimate the cost of a state education In the YouGov survey, 50% of parents of children of school age or under, or adults who plan to have children said that, money or no money, they would prefer their children to have a state education. This percentage differed by location: London parents wanted private schools; Scottish and Welsh parents preferred state education. 60% of respondents who would send their children to state school believed their sons and daughters would benefit from mixing with children from all walks of life, while 38% said they went to a state school and wanted their children to do the same. 37% of these pro-state respondents also said that they firmly believe it is the state’s duty to provide a good-quality free education. However, even if you are planning to send your children to state schools, it can involve considerable expense, including trips abroad, sports kit and after-school activities. And of course there is university to consider. So it makes sense to plan ahead financially – even if you don’t believe in private education. Back to contents page > continued...

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The facts about private education (cont.)

Contact Remember these top tips

n S tart planning early – begin saving as soon as your child is born, or even earlier n T  ake advantage of tax breaks, including ISAs and Junior ISAs n L ook into inheritance tax advantages for grandparents n T  alk to grandparents about setting up a trust fund to ring-fence the money for your children’s education n E xplore scholarships, discounts and bursaries to reduce school fees n If you get into financial difficulties, be persistent – talk to the Head about new payment arrangements n D  on’t underestimate the cost of a state education – it’s still worth preparing and saving for future expenses. Conclusion Many parents who would like their children to be privately educated may be put off by the cost, but good financial advice can help you achieve your dream. With a bit of forethought and careful planning, it really is possible to give your children a private education.

If you’d like to talk to one of our Duncan Lawrie experts and find out how we can help you plan financially for your children’s future: Call John Hilson, Regional Director, London, on 020 7201 3016 or 07590 452440 Email him at [email protected] Or visit www.duncanlawrie.com Back to contents page >

The research was conducted by YouGov on behalf of Duncan Lawrie Private Banking. The total sample size was 2,210 adults. Fieldwork was undertaken between 12 and 14 August 2013. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+). Sample of adults who have children of school age who attend private school was boosted to a sample size of 55 respondents. Fieldwork was undertaken between 12 and 16 August 2013. The survey was carried out online. *Source: Tatler Magazine, August 2013 edition. Duncan Lawrie Private Banking is a trading name of Duncan Lawrie Holdings Limited and its subsidiaries, represented in the UK by Duncan Lawrie Limited, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority and Duncan Lawrie Asset Management Limited, authorised and regulated by the Financial Conduct Authority. Their registered office is 1 Hobart Place, London SW1W 0HU. Registered in England under numbers 998511 and 1160766 respectively. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

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