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Saving for your children's education.

Five top financial tips for parents

Start saving early to send your children to school and university. As more people face reduced pay packets or even redundancy, saving and planning for your children’s education has become even more important.

In addition to reduced incomes, families have also seen the average school fee increase by more than 10% a year over the past few years. Little help is available to parents as specific ‘school fees funding products’ can no longer keep up with this increase and have been withdrawn, and despite many private schools being registered as Charitable Trusts, school fees are not eligible for tax relief.

As well as school fees, parents also need to be prepared for university costs to increase.

Now that university is considered to be a normal part of higher education, Geoff Everett, tax director at Smith & Williamson, is concerned that fees may increase at a similar rate as school fees.

He says: “If this happens, in 10 years’ time we could see fees reach £7,200 a year. Living expenses and books cost roughly the same amount as fees, so if we use a scenario where the fees rise by 10% and the living expenses rise by 3%, the combined annual cost for a single student in 10 years’ time could be over £11,000 a year.”

So what can parents do to prepare for these costs?

Geoff advises: “Start early. If your child is still relatively young, for example in junior education, there is still enough time to invest on a regular or lump sum basis.

“How you invest will depend on your particular circumstances but as far as possible parents should aim to minimise their combined tax bills by making full use of their tax allowances and the lower tax bands.  Tax-free opportunities such as ISAs should be considered for anyone aged 16 and above and don’t forget everyone, whatever age, has an annual tax-free capital gains allowance, currently of £10,100 (for 2009/10).  

“If you put income-producing assets such as shares or cash deposits into your child’s name, as a parent you will generally be taxed on the income. However, if the asset comes from others, for example grandparents, the child can receive income up to £6,475 per year tax-free, so this can be a very tax efficient arrangement. It may also result in inheritance tax savings for grandparents.

In addition there is a valuable IHT relief for regular gifts within normal expenditure. This means that if grandparents pay school fees on behalf of their grandchildren, or make regular gifts to the children in anticipation of school fees or other expenses, those payments would escape future IHT liability provided the grandparents are left with sufficient income to live on.

It’s also worth noting that capital gains are treated as the child’s even if you provide the assets, so a parent could gift or buy assets, which aim to generate capital gains rather than income, to a child and the child could sell them, making a capital gain each year of up to £10,100. The key is to plan ahead!”

Smith & Williamson’s top financial tips to help parents funding school fees or university costs:
•          Save early
•          Consider ISAs and other tax-free accounts
•          Take advantage of capital gains allowances, currently £10,100 per person per year, irrespective of age
•          A child can earn tax-free income from assets gifted by non-parents
•          Discuss with grandparents the possibility of them helping to pay school fees

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