Flexible School Fees Planning                         

Funding From Income - Regular Savings   

If your school fees have not started yet, or they are still affordable, then save as much as you can now in flexible policies that you can start and stop without penalty (such as ISAs). This will build your savings that can be dipped into when fees become more difficult to fund. 

At the point that fees have reached a level where they are no longer affordable from income; then draw from your savings. 

If your savings have been exhausted; you might arrange a loan facility secured on the equity in your property; then you can draw down fees and only pay interest on the loan as it is drawn. 

Funding From Income; Together With A Lump Sum 

In a plan that incorporates both capital and income: the most important planning questions are: 

• How much of the fees do you need to find from your income and how much from capital?  

• Where does it make greatest sense to use your capital?     

One very simple approach to determining a plan structure is to plot your children’s current fees, without allowing for inflation; then plan for the overlapping periods that are the most demanding.  

For example: Adam’s fees are currently £ 10,000 p.a. and are payable for a further five years; Eve’s fees commence in one year (currently £ 10,000 p.a.), and are payable for seven years.  The overlapping period commences in one year and lasts for four years. 

Income Adequate For One Child’s Fees  - If the planner is currently funding Adam’s fees from income they might apply capital to the period the school fees overlap, the likely requirement for capital is £ 40,000 (4 x £ 10,000). Then, when Adam’s fees cease Eve’s fees are paid from income.   

Income Comfortably Funds One Child’s Fees - If the planner is comfortably funding Adam’s fees from income, then they might increase their payments from income to a higher level, say £ 12,000 p.a.  This would top up savings for one year. The likely requirement for capital is £ 32,000 (4 x £ 8,000) which could be replenished once Adam’s fees have ceased. 

Income Falls Short Of Funding One Child’s Fees - determine the level of fees you can afford and apply capital to the shortfall and the period the school fees overlap.  If they wish to fund £ 8,000 p.a. from income, then the likely requirement for capital is £ 64,000 (5 x £ 2,000 + 4 x £ 10,000 + 7 x £ 2,000). 

Income & Capital Falls Short Of Funding Both Children’s Fees - determine the level of fees you can afford and apply capital to the shortfall and the period the school fees overlap.  When the capital is exhausted you might consider taking a loan drawn down against the equity in your property, in this way interest is only paid on the loan as it is drawn. 

These strategies assume school fee inflation is offset to some degree by inflation and that the return on capital approximately equals fee inflation. 

Funding Fees From A Single Capital Payment - as a rule of thumb… to calculate the capital required to fund fees from a single lump sum payment you might use the total of the uninflected fees.  The likely requirement for capital is £ 120,000 (5 x £ 10,000 + 7 x £ 10,000). 

Many independent schools offer discounts where some or all a child's fees are paid in advance; this is commonly known as Composition Fees.  Capital applied in this way is immediately removed from the investor’s estate; which has potential IHT planning implications.  

Spread The Cost - many parents will experience difficulties in funding school fees from taxed income and it may become necessary to borrow to fund fees. 

Some planners suggest raising capital, which is then invested to fund the school fees.  This is a higher risk approach however, than arranging a credit line and only drawing a loan down as required.   

The effect is to spread a proportion of the fees over a longer period; which can help make to make school and university fees, more affordable.  

Children’s Interest Taxed As The Parents  - If parents invest for the benefit of their own child, aged under 18, the income arising from the investment is taxed as if it were the parents.  However, a parent can utilise a child’s capital gains tax allowance (£ 9200 2008/09).

Grandparent Planning - Grandparents (and others) can, not only utilise the child’s personal income and capital gains tax allowances, there can also be Inheritance Tax savings.