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The recent removal of the VAT exemption on private school fees means that many independent schools are now considerably more expensive.
While some schools have offset the increase through cost-saving measures, others have already started charging the full 20% extra.
The rise in fees has caused many parents and grandparents to explore new strategies to cover the costs while remaining financially efficient.
However, misconceptions around gifting and paying fees can lead to costly mistakes, so it is important to understand the rules as well as the fee changes.
Private school fees have increased by 14% on average
The latest figures from before the VAT exemption was rescinded show average annual private school fees to be:
- £18,000 for day school
- £24,000 for day pupils attending boarding schools
- £42,500 for boarders.
The official school fee averages without the VAT exemption will not be made available until later in the year. However, a study of 964 private school fees registered since the VAT exemption was removed found that:
- Half have increased fees by 15% or more
- A fifth have increased fees by the full 20%
- The average fee increase is 14%[1].
Moreover, a separate study estimated the total cost of sending a child to a private school for their entire education to be £350,000 for day pupils and £694,400 for boarders.
These costs are roughly 80% higher than the £194,000 it would have cost for a child starting school in 2010 and completing their A-levels this summer, or the £392,300 for a boarder during the same period[2].
3 commonly held misconceptions around gifting and school fees
As more parents seek financial support from grandparents to cover school fees, it is important to be aware of some common misconceptions surrounding gifting.
1. “School fees are exempt from Inheritance Tax”
It is commonly believed that school fees are automatically exempt from Inheritance Tax (IHT).
However, if a grandparent pays fees directly or gifts a lump sum to cover them, this could be considered a potentially exempt transfer (PET) and may be subject to IHT if they pass away within seven years of giving the gift.
Similarly, many grandparents set up bare trusts to help pay for school fees. Bare trusts can be particularly advantageous as any funds withdrawn from the trust are taxed as if the child owned it, which usually means they pay little to no tax.
As with gifts, funds within a bare trust may be liable for IHT if the grandparent passes away within seven years of placing their wealth in the trust. After seven years, the funds fall outside their estate for IHT purposes.
The rules for parents opening bare trusts are slightly different, and they tend to be more tax-efficient when opened by grandparents.
2. “Gifting from capital is the same as gifting from income”
Individuals benefit from a £3,000 annual gifting exemption, which enables them to make tax-free gifts each year without affecting their IHT position.
This allowance, if previously unused, can be carried forward by one year, meaning an individual can gift up to £6,000, or two people can gift a combined total of £12,000, all becoming IHT-free immediately.
But it is important to distinguish between gifting from capital and gifting from income:
- Gifts from capital that are above the annual gifting exemption – such as lump sums from savings or investments – typically fall under the seven-year rule for IHT.
- Gifts from income – such as pension income, dividends, or rental income – are free from IHT even if they are above the gifting exemption, provided they are made regularly and do not affect the donor’s standard of living.
By understanding these distinctions, families can tax-efficiently plan school fee payments, ensuring they make the most of available exemptions and allowances.
Your wealth planner can help ensure that the donor’s gifts are compliant with tax regulations, optimise the use of allowances and exemptions, and develop strategies to minimise potential tax liabilities.
3. “There are only a small number of scholarships and bursaries available”
Independent schools often offer scholarships and bursaries to support students, typically based on their academic achievements or social background.
While many people believe there are only a handful of these available, a 2024 study found that 33.5% of private school pupils received some form of financial support, amounting to almost £1.4 billion in total[3].
Get in touch
Your wealth planner can help you remain tax-efficient while you pay for your child or grandchild’s school fees. They can examine your tax records to ensure you make full use of any available allowances and exemptions while keeping in line with the latest regulations.
Contact your wealth planner to discuss IHT-efficient strategies for paying for a child or grandchild’s school fees, or for more information.
If you are yet to engage with us, please email info@ipscap.com to find out how IPS Capital can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, or trusts.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
[1] 03.03.2025 Private school fees rise as VAT policy kicks in MoneyWeek
[2] 03.03.2025 The £350,000 cost of sending your child to private school The Times
[3] 03.03 ISC Census and Annual Report 2024 Independent Schools Council
