£130,000 - that's the bill for seven years at school

Sam Dunn reports on how to budget for private education
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The Independent Online

School days are rarely the happiest of your life but you can count on those spent in private education to be some of the most expensive. The average cost for an 11-year-old starting at one of the UK's 1,200 fee-paying independent schools next month is expected to top £2,588 per term, or £7,764 a year - an 8 per cent increase on last year, says Ruth Stedman, spokeswoman for the Independent Schools Council.

And between the ages of 11 and 18, assuming a conservative inflation rate for school fees of 6.9 per cent, fund manager JPMorgan Fleming calculates that the bill for parents of children born this year will be £129,000.

Given sums like these, parents need to do long-term financial planning, particularly if they want to support children through university too.

"You cannot start saving early enough," says Ian Lowes, managing director of independent financial adviser (IFA) Lowes Financial Management. "If you are saving for an education starting in 10 years' time, an ISA [individual savings account] is the best place to start - and each parent should use their £7,000 ISA allowance."

For investments to build up over 10 years, he recommends a balanced portfolio of cash ISAs, and unit and investment trusts with a bias towards equities. But he warns that the level of income generated by such funds can be unpredictable, so you should check on the performance of your investments regularly.

Grandparents can be helpful benefactors by buying shares or funds on the child's behalf, creating a "bare" trust. Like everyone else, a baby or child has a personal income tax allowance of up to £4,615, so any dividend income won't be taxed twice up to this level. Any capital appreciation in the investment will count against the child's own capital gains tax liability; anything over £7,900 in the current tax year incurs CGT.

But watch out for tax on payments that you may make into the trust as a parent; if the income earned by your invest-ment exceeds £100 a year, it will be assessed - and taxed - against your own income.

There are other potential tax breaks. Grandparents can put up to £3,000 in a trust free of inheritance tax (IHT) each year, while gifts in excess of this can be made IHT-free as long as benefactors live for at least seven years afterwards. Regular payments can also be made exempt from IHT as long as the donor's living standards remain unchanged.

There are further ways to save money for the long term. Mr Lowes suggests switching to an offset mortgage or buying a traded endowment policy (TEP). The former allows you to transfer your savings into the same bank as your mortgage and offset them against your loan for cheaper interest repayments. This can be useful for those who are risk averse and prefer to stay in cash.

TEPs, which mature at set dates, are also worth considering since poor market sentiment has forced prices down. The possibility of bonuses between the purchase of a policy and its maturity has made some products, such as a November 2012 TEP from Clerical Medical, worth a punt, according to Mr Lowes.

Given the amount of money needed, you should seek independent financial advice and tax planning to maximise your investment returns.

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