Britain’s wealthiest parents can have their private school fees slashed and save on their tax bills under deals being offered by some of the country’s leading independent schools.
Under them, parents are encouraged to stamp up fees in advance for all or part of the years their children are at private schools.
The advance payment is then invested by the private school which, because of its charitable status, is exempt from paying any tax on interest earned from the investment.
One school, Radley College in Oxfordshire, with fees of just over £30,000 a year, estimated one in six of its parents have taken advantage of the offer - with £17 million accruing to the school as a result.
Its website say that “funds paid into the scheme are invested in British Government or other fixed interest stocks which guarantees both interest payments and capital redemption”.
“As the College enjoys charitable status it does not pay tax on the interest received,” it adds, “this can be very beneficial when parents and others are assessed at the higher rate of tax.”
Teachers’ leaders last night expressed reservations over the schemes, if they were promoted as a means of parents avoiding tax on investments.
If the parents had invested the money themselves, they would have been liable to pay tax on any interest earned. In addition, they benefit from the tax-free nature of the investment through the discounts offered to them.
The plans are designed for those parents capable of paying several years’ fees in advance.
On its website, Harrow School highlights the “tax-efficient” nature of the scheme, saying it offers “attractive returns” that are “tax free”.
Stowe School in Buckinghamshire tells parents that it anticipates “rates of return of between three and five per cent” for payments made under its “fees in advance” scheme. It says the money invested will be held “in a trust which does not pay tax on its dividend and interesting earning”.
Malcolm St John Smith, chairman of the Association of Teachers and Lecturers’ independent and private sector advisory group, said: “While it is understandable business practice to get a discount if you pay for something up front, we would be concerned if schools are suggesting their charitable status can be used by wealthy parents to help them avoid tax on investments, as it brings a school’s charitable status into disrepute.”
Barnaby Lenon, former headmaster of Harrow School and now chairman of the independent Schools Council, told the Times Educational Supplement that “quite a number of schools have been doing this for many, many years”.
Mike Lower, general secretary of the independent Schools’ Bursars’ Association, added: “It is a facility that most schools would advertise but it is not widely taken up.”
More effort now goes into making it more easy to pay through monthly instalments, rather than a year at a time, he added.
A spokeswoman for the Charity Commissioners said: “It is not unusual for charities to offer a discount on its services, For example, a charitable membership umbrella body may offer 12 months membership for the cost of 10 months membership if the member pays the full amount up front rather than in monthly instalments."
“It is clear that this is likely to be in the best interests of the charity in terms of securing income.”
The crux of the matter was whether the income accrued was used to further the organisation’s charitable.
“Our concern is that trustees fulfil their duty of prudence in managing their investments,” she added. “We would though expect any charity to review its investment policies if serious concerns are raised about its approach which might have a significant impact on the charity’s reputation and wider public trust and confidence in the charitable sector.”
Charity begins at school: How the schemes work
Parents are asked to pay a lump “advanced fee” sum to cover all or part of their child’s education at the school.
The money is then invested by the school which, because of its charitable status, does not have pay tax on any interest earned.
The parent is offered a discount on the fees - the amount of which could be varied by the school according to the income earned on the investment. Also, if the parent had invested the money themselves, they would have had to pay tax of any income earned.