Name: Aileen Scott
Company: Campbell Dallas
Campbell Dallas are Charterted Accountants, based in Renfrew, Glasgow.
Back to School
Summer holidays are underway and for many that will mean a welcome break from work and possibly also a brief break from the monthly payment of school fees. Looking ahead to the start of a new term in August now is the time to take some action to reduce the school fees burden for the coming year.
If you have chosen to educate your children privately this can be a costly decision. In addition to the main school fees there may be fees for extra curricular activities such as school trips and sporting equipment. All of these expenses are met from income which has already been taxed, usually at either 40% or 45%.
For families with their own business it can be possible to structure the payment of the school fees in a tax efficient way thereby reducing the effective cost by up to 30%.
Q: Is this planning available to anyone paying school fees?
Unfortunately this planning is only suitable for individuals that have a stake in their own business and who can therefore draw income in the form of dividends. For those who are employees, and receive income in the form of salary and benefits in kind, this solution will not be available to them.
Q: How does it work?
The planning is never identical for any two taxpayers as no two businesses are the same. This planning is bespoke and is flexed to fit the family’s particular situation and needs. Nonetheless there are some common features in that a trust will be established to meet the costs of education of one or more children. A small number of shares in the business are gifted into the trust but with the control of the company and the ownership of the underlying capital value of the company remaining with the existing shareholders.
Dividends paid to the trust in respect of that shareholding can then be used to meet the educational costs of the children who are beneficiaries of the trust.
Q: How are the savings achieved?
The type of trust that is used for this planning ensures that no income tax liability arises where the income received by the Trust has already been taxed at source. Where dividends are paid by a company they are treated as having being taxed at source and therefore the income is paid to the trust without any further liability to tax arising. In contrast the same dividend paid to a parent, from which they then pay school fees, attracts a personal income tax liability of up to 30%.
Q: Is this planning a tax avoidance scheme?
Tax avoidance schemes and those that have used them have come under increased scrutiny in the press and also under increased attack from HMRC, and this is therefore a common question asked by those considering any type of tax planning. With the introduction of the General Anti Abuse Rule (GAAR) HMRC have issued guidance notes which acknowledge that not all tax planning is abusive and caught by the legislation.
With this type of planning structure there is no artificial loss created, the income concerned is subject to corporation tax in the hands of the company, as normal, with the dividend tax credit satisfying the tax charge that would otherwise arise for the trust / beneficiary and therefore is not an abuse of the tax legislation. Furthermore the planning is specific to the existing business structure which already exists and is designed around that thereby removing the hallmarks of scheme.
Q: Are there alternative ways in which school fees can be paid tax efficiently?
For those lucky enough to have large amounts of capital lying around investing in a bond which permits 5% tax free annual withdrawals to meet the school fees is an alternative. For most of us our capital is either tied up in our homes or in our businesses and this alternative is simply not an available option.