Friday, 24 August 2012

School Fees Planning Benefits

The benefits of school fees planning are often misunderstood. I wish I had a pound for every time someone asked me "is IT a savings plan." The incorrect assumption underpinning this question is that people think they are about to sold something, a product.

School fees planning IS NOT a product, it is a service. For far too long the financial services industry has relied upon products and the transactional nature of product sale to support itself.

The way I see it the product (pension, ISA etc) is at the bottom of the food chain. The real value in school fees financial planning is helping people to establish a plan. Showing them the size of the problem (amount of school fees), what impact that will have on their lifestyle and future plans and then finally and most importantly show how we can achieve it.

I had a meeting recently with someone whom unlike many people I see had more than sufficient  capital to pay his school fees up front.

He unsure how I could help. This is never a problem because of course at that point, neither do I... The point of a first meeting is to understand a client's requirements, aspirations and lifestyle expectations and to identify and explore some of the options which may be beneficial to them.

He was indeed in good shape financially but what he didn't have was a plan. He had an idea on when he wanted to retire but beyond that, very little in terms of a plan. He missed the vital truth, as your circumstances change your plan needs to change.

At the end of the meeting I had described to him how his position lent itself to a huge array of opportunities and that I could definitely help with school fees. I outlined a plan and we arranged to meet again the following week by which time I would have put meat on the bones and be able to give him a "roadmap" of the plan.

Previously he was paying for his son's education twice, once in tax at 40% to HMRC and then again to the private school. Now we have removed this unfair tax arrangement and allow him to pay his school fees in a much more tax efficient manner. He still pays plenty of tax however what he is not paying for is a state education that he isn't using!!!

Ultimately there are often products sitting behind advice but the products are not the important bit, having a goal, working out how to achieve it and continually working toward that goal is what's important and for that you need a plan.

If it was called school fees product I could understand but it's not it is called school fees planning because that is exactly what it is, a plan!

Wednesday, 4 July 2012

Tax avoidance is not morally wrong its sensible

If high earners avoid paying tax legally who really has the right to comment on it. If you have broken no law then why not, if you have worked hard be able to without reproach do what you can to minimise your tax liability...

Is the problem just that many people are simply jealous that a very few people earn a lot of money?

A person using the K2 tax scheme may have the ability to reduce their income tax bill to only 1% however if that person is earning £3m per year they are still paying over £30,000 in income tax. That's a huge amount of money, more than most people earn...

If I earned millions then I would do what I could to reduce my tax bill, I think most people would do exactly the same if they were in that position. Its got to hurt when nearly half your earnings go in income tax. Is it right that someone should have to pay £1.5m from their earnings of £3m. Ouch!!!

When does tax planning become "morally wrong"?

If over the past 20 years you had saved into a PEP / ISA by now you could have amassed a sizeable pot of money; using very simple maths that could be possibly somewhere around £250,000.

Income from ISAs can, depending on where / how it is invested, be tax free meaning that £250,000 could produce an income of somewhere around £12,500 per year probably more, potentially, tax free. Is that morally wrong? A person could life for the rest of their lives (albeit frugally) without paying any more income tax!
Using an EIS type investment could reduce your income tax bill dramatically, in some instances meaning that you pay less than 1% income tax. EIS investments are broadly open to most people so is that morally wrong?

If a person reduces their income tax bill from £6,000 to nil is that more or less morally wrong than someone reducing their £1.5m income tax bill to a mere £30,000.


There is something else which is rarely mentioned when people are banging on about tax dodging high earners. How much do they generate in VAT and other taxes? If I had avoided the majority of a £1.5m income tax bill then I am more likely to go out spending my money which generates tax in other ways!!!

To buy a new Mercedes Maybach 62 will cost somewhere around £350,000. Included within that figure is around £60,000 in VAT and Road Tax. Let's not then forget these cars cost around 50p per mile in fuel!!!!!!! 32p of which is fuel duty and yet more VAT.

I assume that if you have the money to afford the car in the first place you probably aren't too worried about keeping your journey's to a minimum. 20,000 miles would therefore add a further £6,400 in fuel duty (incidentally that is more than most people pay in income tax).

This is just a small and silly example but we are taxed heavily in this country and for that we receive amongst other things free education for our children and free medical care through the NHS. Need I point out that many high earners (if not close to all) will privately educate their children and use private medical facilities; all of which cot money and will produce tax revenue.

Finally, lets not forget that many of these people earn their huge amounts of money by being the titans of industry we so desperately need to drag us out of recession, or maybe they are just comedians that entertain the nation therefore earning their money from television or by packing out theatres the length and breadth of the country, all of which generates a flow of money and therefore tax revenue for HMRC...

So, lets not berate the wealthy for being clever with their tax affairs because in many cases we benefit from them, their businesses or the tax they pay in other forms which help pay for the public services we use and they don't...

School Fees Inflation 2012

School fees inflation appears to be holding steady just under the 5% the latest Independent School Council annual census reveals.

School fees inflation is the bane of many parents, especially those who fail to plan. In an article I posted back in 2010 I showed how school fees had doubled in the 10 years since 2000. With such significant increases year on year it is folly not to think very seriously before embarked on the cost of private education.

As the economic climate has frozen since 2008 inflation in the private education sector has slowed but not by much.

This year the overall cost has increased by around 4.5% however the 2012 census shows an increasing disparity in the inflation between Boarding fees and Day fees at boarding schools.

Boarding school certainly remains predominantly for the financial elite at an eye watering average of £26,340 per child per year. Remember of course that these fees are increasing at a gallop. In 2011 the average annual boarding fee was £25,152, an increase of 4.7% and back in 2000 they were just £13,341 per child per year.

That said, the actual cost of education at these institutions is actually increasing at a much slower rate these days. In the 10 years to 2010 day fees at boarding schools increased by far the most, 104% over the period. It would appear that this particular part of the system has hit a temporary ceiling as inflation this year is a mere 3.1%, much less than the 4.5% average.

Day fees at day school on the other hand are increasing more than any other area at 4.9%. The difference between average day fees at a boarding school and a day school is a little over  34% (£1,200 per term). Back in 2010 this difference was over 38% however in 2000 it was a shade under 30%. Hopefully it will return to under 30% over the coming years...

In any case both sets of fees are going up in line with or higher than inflation.

If you are considering private school then you must take account of the fact the fees will increase, probably by more than your wage increase and in addition there is often a sizeable jump in fees from prep school to senior school which is only compounded over time by inflation.

There are many ways in which financial planning can make the burden of school fees less onerous; many involve simple planning ahead however many more include tax planning, pensions & mortgages all of which can make paying school fees massively more efficient than simply waiting for the bill to hit the doormat. If you have a question, please get in touch.

Thursday, 12 April 2012

Enterprise Investment Schemes and private school fees

*** All references to tax relief in this post are accurate at time of writing. ***

Both Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) are becoming more important and certainly more prominent for people looking to plan for long term school fees.

Like ISAs and Pensions, EIS and VCT both long standing investments carry significant tax relief. In all honesty it is not too difficult to argue that they are actually better in certain circumstances than ISAs or pensions.

As always it is important to receive good quality financial advice before considering any investment.

How these little beauties help with school fees is of course not for everyone but in certain circumstances they can make a massive difference (reduction) in the overall cost of private education.

To start with, both receive tax relief at 30% but crucially this is not (unlike pensions etc) restricted to your marginal rate of income tax.

You can claim relief up to the amount of tax you have actually paid which makes this insanely efficient for basic rate tax payers that have either significant cash reserves or possibly for a husband and wife where one partner provides the majority of the household income and the other  just a small additional amount.

Let me give you an example:
Mr Jones earns £38,105
Personal allowance £8,105 (2012 / 2013)
Taxable income £30,000
Tax due £6,000

In addition Mr Jones has an £80,000 inheritance

For an investment of £20,000 into an EIS Mr Jones would receive relief of £6,000. Unlike with a pension though this relief is paid back to Mr Jones, not added to the investment meaning Mr Jones will have paid no income tax for the year, will have a £20,000 EIS investment and have an additional £6,000 to go toward his school fees etc.

There are many more additional benefits such as IHT relief after 2 years and capital gains rollover relief both of which go to make an EIS incredibly tax efficient.

Mr Jones repeats the above investment for the subsequent 3 years meaning he has invested all of his £80,000 and paid little to no income tax for 4 years.

In order to fully qualify for the tax relief an EIS must be held for 3 years from production of the investment certificate. In practical terms this can take some time so for safety sake it is best to assume 4 years instead of 3. Once you investment has passed the 3 qualifying years you are able to dispose of the investment and then reinvest it in another EIS which attracts a further 30% tax relief.

Using the example above it would mean that for Mr Jones, in year 5 he uses the proceeds from his year 1 investment to attract a further 30% relief. That could mean that Mr Jones receives a further £6,000 relief on the same £20,000 investment. The net cost to him would at that point be £8,000 (£6,000 relief in year 1 and a further £6,000 relief in year 5). In year 9 the cost of investment, given a further £6,000 relief would mean the actual real investment cost would be only £2,000.

In year 6 he uses the year 2 investment
In year 7 he uses the year 3 investment
In year 8 he uses the year 4 investment
In year 9 he uses the year 1 & 5 investment

and so on....

If you haven't already got it this means that for £80,000 Mr Jones has reduced his income tax bill completely and potentially indefinitely and has also received an annual £6,000 contribution towards his school fees.

I appreciate given school fees inflation and the current cost of school fees £6,000 is only a small contribution however it comes 100% from HMRC from money that would otherwise have been lost as tax...

There is a lot of talk at present about the super wealthy in the UK getting away with paying little to no tax. However, I hope you would agree that this is close if not quite exactly the sort of situation many millions of people are in the UK and benefits them far more than any tax relief the super wealthy receive; in effect, a 150% tax relief on income...

*** All references to tax relief in this post are accurate at time of writing. If when reading this post it is significantly (over a year approx) old then please double check the tax relief status on the types of investment mentioned. Your financial adviser should have absolute up to date information about the investments ***