Could there be an exodus from private education in the UK?

With the recent introduction of sanctions imposed on individuals with links to Russia, and the debate regarding the non-dom tax regime prominent in the news once again, there may be an unforeseen impact on the flow of students and money within the UK’s renowned education system.

The addition of record-breaking levels of inflation to this potential drop in student numbers means the price of tuition, accommodation and maintenance is likely to rise sharply, creating significant cost increases for families. The decision to privately educate children can be a decade(s) long commitment, and does not come cheap, so tax-efficient school fee funding and revisiting existing planning is now more important than ever before.

An oft-overlooked tax exemption is making gifts out of excess income. This can be particularly valuable for school fee funding as the gifts are immediately exempt from inheritance tax, and there is no limit on the amount that can be gifted. However, the gifts will come from post-tax income, so this may not be the most tax-efficient way to fund school fees if income-producing assets can be gifted instead.

Another solution that families can explore is for grandparents to gift income-producing assets, such as rental property or family company shares, to their grandchildren or to a family trust, to help meet the costs of school and university fees. If a parent creates a trust for their child or gifts them income-producing assets directly, this will often result in any income arising remaining assessable on the parent. There is therefore unlikely to be any tax advantage of doing so.

However, no such rule exists for grandparents. The income generated may fall within the grandchildren’s income tax allowances and could potentially allow for a more tax-efficient means of funding educational costs.

Making substantial gifts to cover educational costs is not something that should be rushed into. Aside from the tax implications, a large outright gift to a young individual may not be suitable. There are often concerns around asset protection and financial immaturity, which is where a trust can be beneficial as it allows grandparents and parents to retain control over the assets.

Families should think hard about whether inheritances should skip a generation. However, it’s clear that forward planning may help to substantially mitigate the impact of school fee increases.