The cost of higher education, whether tuition fees and/or living costs, represents a significant financial commitment for most families. Long-term planning for these costs is important to ensure a higher education and the benefit it brings remains available and affordable for our children when the time comes. Long-term, tax-efficient planning can assist with allowing family wealth to cope with these costs.
Universities throughout the UK are able to charge UK and EU students up to £9,250 per year for tuition (international students typically pay substantially more). Scottish and EU students will not be charged where they attend a Scottish university, although an honours degree at a Scottish university will typically take a year longer, four years, therefore the funding of living costs is required for a longer period than in England or elsewhere. Students from the rest of the UK attending Scottish universities are required to pay tuition fees.
Scholarships and philanthropy
Scholarships and financial support will sometimes be available, although this is much more common in certain countries abroad. American universities, for example, also charge but large endowment funds can also assist with funding. Some scholarships are not widely known about so time spent investigating them can bear fruit financially.
Children’s Individual Savings Accounts (ISAs) allow a sum to be invested per annum for a child and any interest earned is tax-free. Funds are locked in until the child reaches the age of 18 and this is a good way of building up a tax-free nest egg that could be applied to higher education funding.
Parents can also invest in a stocks and shares ISA, which allows assets to be built up in a tax-efficient environment. Funds can be accessed at any time. The current ceiling for investment in an ISA is currently £20,000 per year (2019/20).
Setting aside funds in trust can be an efficient way for grandparents to reduce their chargeable estates for inheritance tax. These trusts can be used to fund higher education costs in the future. Straightforward gifts from grandparents or other family members will often also have long-term inheritance tax benefits for families.
Children's Trust Funds
Children born between 1 September 2002 and 2 January 2011 can have a trust fund account. While HMRC provided some initial funds to these trusts, the main attraction is the ability of parents, family and friends to add a limited sum of money to the account every year. There is no tax to pay on children’s trust fund income or gains.
Cost-effective student loans are available up to certain limits to facilitate maintenance and for appropriate payment of tuition fees. These can be paid off in fairly generous terms compared to commercial lenders.
Use Inheritances through Deeds of Variation
Parents will often receive an inheritance. This may be used directly to fund or assist with higher education costs. With a view to longer term inheritance tax planning, an inheritance could be redirected by way of deed of variation to the student or a trust for their benefit. Restructuring an inheritance in this way can have long-term inheritance tax benefits for a family.
To maximise tax-efficient investment, national savings products can be considered. Premium bonds, fixed interest and index linked savings certificates along with children’s bonus bonds are all income tax free.
Long-term saving, as tax efficiently as possible, will assist with the costs of higher education. Some investment providers operate savings plans that can be an attractive and administratively efficient way of building up a fund over a long period of time, often by way of a regular standing order. Up to certain limits, these plans will often be structured as ISAs.