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Deciding to invest in providing private education for your children can be an expensive choice so reducing any related tax burden is welcome. The average day school term fees in Scotland range from £2009 for nursery to £3318 for senior with the latter rising to £8693 for boarders and to raise these sums many parents draw money from their family business.

 

Campbell Dallas, one of the most progressive independent chartered accountants in Scotland, has a separate tax consultancy team dedicated to developing strategies to assist clients to reduce their tax liability. Because of the number of clients affected by the school fees issue the team carried out research to find a way to assist these families and can now provide a bespoke solution for business-owning families to achieve significant savings and in some cases eliminate the tax burden.

 

Rhona MacKinnon, assistant director of the award winning firm’sTax Consultancy Group, explains that for higher rate taxpayers in particular who have higher rate tax liability associated with cash they draw for school fees, there are various ways they can help reduce these costs.

 

“We have established a model for tax planning for school fees which at the moment is primarily for higher rate taxpayers who own their own businesses. Normally if they required an extra £9,000 to pay school fees they had to draw a dividend of roughly £12,000 to be left with that £9,000 after tax. However, a Trust set up by a grandparent, aunt, uncle or other relative can have flexible provisions for the benefit of the children and their education. The tax benefit can extend beyond school years if the children go on to fee-paying further education. 

 

“An income source is settled on the Trust by the relative and income from the Trust goes to meet the educational costs of the beneficiaries. The Trustees are given the responsibility of making sure the funds in the Trust are applied for the benefit of the children so if that means providing the deposit for a flat in the future that would be another acceptable use of the income.

 

“The Trust and its establishment is designed to fall outwith HMRC’s settlement provisions which, if invoked, could result in the parents being subject to higher rate income tax liabilities on the income of the Trust. As an example of the type of savings available, earlier this year we were approached by a couple who, in addition to their main income, run a partnership business providing medical services. They have two children in private schools with total fees of around £25,000 a year that they were funding through net income after paying higher rates of tax. We recommended that the couple operate as a limited company and a Trust be set up for the children by their grandparents. This is now saving them around £8,000 a year which will continue for many years, even when their children advance to further education.

 

The Trust can be used to meet nursery and university fees as well as school fees, even living accommodation, as long as it relates to the child or children who are the beneficiaries of the Trust. At the moment it works mainly for those who own a family business however there are many people who are in employment who pay private school fees. We are currently investigating how to assist them to find a more tax efficient solution.

There is no ‘one size fits all’ tax planning for school fees and even if you are not paying higher rate tax at the moment or if you are trading in a partnership or as a sole trader you shouldn’t rule it out.

 

We believe it is always worth having the conversation, as circumstances can change and any planning is best carried out well in advance.

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