Posts By: S4 Financial

High costs of private education

The significant decision of choosing a private school for children

Choosing the right educational path for your children is one of the most significant decisions you will make as a parent. Among the many considerations, private schooling often emerges as an option due to its perceived benefits, such as smaller class sizes, specialised programmes and personalised attention. 

However, the high costs associated with private education can make this decision even more complex. Data from the Independent Schools Council reveals that the majority of pupils attend day schools, meaning the typical fee level is £5,552 per term or £16,656 per annum, a rise of 5.8% from 2021 to 2022[1]. 

This equates to a hefty total of £116,592 per child for those who opt for private secondary schooling through the end of sixth form. And these figures don’t include potential increases in fees over time. The financial burden can be even greater if considering private primary or preparatory schools.

Easing the financial burden: Role of wealthy grandparents

However, grandparents have the capacity to alleviate this financial strain on their adult children while simultaneously addressing a looming Inheritance Tax (IHT) issue.

Inheritance Tax: A growing concern

UK families are increasingly feeling the pinch of IHT when family members pass away. In the fiscal year 2022/23, IHT receipts touched a record high of £7.1 billion, according to HM Revenue & Customs (HMRC) figures[2], an astounding 108% increase over the last decade. Presently, IHT is levied at a rate of 40% on estates exceeding the nil-rate band, which stands at £325,000, or £500,000 if the property is being left to children or grandchildren.

Navigating IHT: Role of gifting

One method of reducing your loved ones’ IHT burden is to start giving away surplus money. The less money you possess over the nil-rate band, the smaller the tax bill. For grandparents, contributing to school fees can serve a dual purpose: reducing your IHT bill and witnessing your grandchildren benefit from your wealth.

With IHT gifting rules, implications arise when gifting outside of the exemption rules. However, there are no limits on the amount you can give away. Here are several allowances you can leverage, whether you’re paying the entirety of the school fees or making a contribution.

Yearly Exemption: Every year, you can contribute £3,000 tax-free to any individual of your choice. Couples can unite to offer a combined tax-free gift of £6,000. Moreover, you can carry forward the unused portion from the previous year, although this can only be done once. This yearly exemption can also be paired with a donation from surplus income and given to the same recipient.

Gifts beyond allowances and Inheritance Tax (IHT): Even if your donations exceed these allowances, you might still not have to pay IHT and some gifts may be chargeable lifetime transfers. Any gifts you make that go beyond the allowed exemptions are seen as ‘potentially exempt transfers’ and fall under the seven-year rule. This implies that if you survive for at least seven years after making the gift, it will be removed from your estate and won’t be subject to any IHT. If you pass away before seven years, taper relief may apply to gifts surpassing the £325,000 threshold.

Trusts: An effective tax strategy

Instead of making direct payments to your children’s school, you might discover tax benefits using a trust to fund your gifts where the gift would be to the trust. When you donate money into a discretionary trust, control over the underlying capital’s management is in the hands of the trustees, who could be the grandparents and/or the parents. Yet, the income produced could be applied towards school fees. This approach can be advantageous from an IHT planning perspective.

IHT planning and trust advantages

Any amount can be transferred into a trust. These assets will be exempt from IHT provided they live for seven years post-gift. An added perk of this method of school fee funding is that the income produced by the trust is taxed at the beneficiary’s rate – that is, the child’s if the trust is absolute. Given that the child is likely to have a lower tax rate than other family members, this can lead to substantial savings.

Trust continuation and university funding

Another advantage is that the trust can continue to operate even after the child has finished school, providing financial support for university life. If the trust is absolute, the child would have to agree to this. However, trusts are complex structures and grandparents cannot benefit once a trust is established. Additionally, given the complexity of trusts, it is crucial to seek professional advice before setting one up.

Need to formulate your plans sooner rather than later?

Early planning is crucial if you face a potential IHT liability and wish to help fund private education for your grandchildren. Discussing it with your children and formulating plans sooner rather than later can be beneficial. To find out more, please contact us and we’ll explain your options. We look forward to hearing from you.

Source data:

[1] ISC Census and Annual Report 2023.

[2] https://www.statista.com/statistics/284325/united-kingdom-hmrc-tax-receipts-inheritance-tax/

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. 

‘Time in the market’, not ‘timing the market’

The allure of quick profits and instant gratification

In the investing world, the allure of quick profits and instant gratification often tempts some investors to employ a ‘market timing’ strategy. This method involves buying or selling financial instruments based on predictions of future market price movements.

Market timing is an active investment strategy aiming to beat the traditional buy-and-hold strategy. It involves moving in and out of the market or switching between asset classes based on predictive methods such as technical indicators or economic data.

Asset fundamentals and financial planning

For instance, if an investor believes that a stock’s price will rise, they may decide to buy it immediately or plan a purchase. Conversely, if they anticipate a decline in the stock’s value, they may sell it immediately or schedule a sale. 

While factors like asset fundamentals and financial planning can influence these decisions, the core of market timing revolves around anticipated price changes. The critical objective of market timing is to capitalise on these market predictions and generate profit. However, this strategy’s success hinges on the accuracy of these forecasts.

The pitfalls of market timing

The track record of market timing is far from impressive. One of the primary reasons for this is the difficulty in accurately predicting market movements. Many factors influence financial markets, ranging from economic indicators to geopolitical events, making it almost impossible to make accurate predictions consistently. 

Moreover, market timing requires investors to make two correct decisions: when to exit the market and when to re-enter. Making a mistake in either of these decisions can lead to significant financial loss.

The power of pound cost averaging

In contrast to the high-risk, unpredictable nature of market timing, a less volatile and more straightforward strategy is known as ‘pound cost averaging’. This technique involves investing a fixed amount regularly, regardless of the market conditions.

For instance, if you have a lump sum of £10,000 and choose to invest £1,000 a month over ten months, you would be less affected by short-term volatility. As you gradually put your money in, any share price movement has less effect on the value of your investment.

Potentially leading to substantial long-term gains

Moreover, this approach allows you to buy more shares when prices are low and fewer when prices are high, potentially leading to substantial long-term gains.

However, it’s important to note that while pound cost averaging can help mitigate some risks, it does not guarantee profits or protect against losses. Like all investment strategies, it comes with its own set of risks, and the value of your investments can fall and rise.

Time to grow your wealth steadily over time?

Investing is not about getting rich quickly; it’s about growing your wealth steadily over time. Therefore, it’s crucial to resist the temptation of market timing and instead focus on building a diversified portfolio that aligns with your financial goals and risk tolerance. Please speak to us to discuss how we can assist you with your wealth creation.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

Journey to monetary autonomy

Optimising your finances and formulating an all-encompassing wealth plan for the future

Everyone is entitled to monetary autonomy, and maintaining financial wellness throughout life is more of a marathon than a sprint. One must deeply grasp one’s financial status to reach short-term and long-term objectives. 

A crucial decade: financial planning in your 50s

Maximising your earnings or laying down a robust financial plan

As you sail into your 50s, it becomes pivotal to consider your financial strategy. Life has likely found a steady rhythm by now. Children have probably taken flight, becoming financially self-sufficient, and the idea of reducing work hours or even retiring completely starts to surface.

Decoding auto-enrolment

Good news on the horizon for future retirees

For employees, auto-enrolment is a crucial component to consider in their retirement strategy. Understanding auto-enrolment becomes critical as we increasingly understand the need for adequate retirement preparation. Historically, while some companies offered their employees the chance to contribute to a pension fund for retirement preparation, others did not. 

Strategies to minimise retirement tax

Many pensioners may face a lurking tax risk as the State Pension grows

Many pensioners may face a potential tax pitfall as the State Pension escalates and Income Tax bands remain fixed. Pensioners are set to see a substantial increase in their income next year. The State Pension is projected to rise by 8.5% in April 2024, following a 10.1% increase in April 2023[1]. 

Taxing times for 2023 

A year marked by several tax changes that impacted higher rate taxpayers

As we approach the end of the year, taxpayers should begin assessing their tax obligations. This is not a task to be left to the eleventh hour, especially considering tax changes coming into effect in 2024.

Millions may have to rethink their retirement plans

More than one in ten have mortgage debt in the final decade before they retire

Two-thirds (67%) of Britons admit to having debt that is weighing them down, according to a recent study[1]. Additionally, nearly one in ten (9%) adults in the UK are unsure about the amount they owe in outstanding debts, rising to more than one in six (16%) among those aged 45 and over.