Schools query 'monstrous' tax

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Ministers are reviewing an Inland Revenue ruling which will increase private school fees by up to one-fifth for more than 20,000 parents, writes Stephen Castle.

The move follows a decision to remove tax advantages which educational trusts, which invest money to pay for private school fees, have enjoyed for more than 30 years. The Inland Revenue ruling, made last month, was prompted by a Charity Commission decision to strip the trusts of their charitable status.

It provoked an outcry from the independent schools and from the trusts, run by the School Fees Insurance Agency (SFIA), the Equitable Educational Trust, the Save & Prosper Educational Trust, the Castle Educational Trust and the Sun Life Educational Trust. A legal challenge is expected soon.

Meanwhile, senior Conservatives are agitated about a move which they say will alienate Tory supporters. Treasury ministers are reviewing the aspect of the Inland Revenue's decision which independent schools and trusts argue is retrospective.

Under the proposals, tax will be liable from March 1997 on annuities which the trusts take out to provide the funds for school fees. Because people take out the plans many years in advance, the ruling will catch those who have invested years ahead.

The Charity Commission's removal of charitable status from the trusts was made on the basis that it is necessary now to show "substantial public benefit" in order to secure tax exemption. It sees the plans as financial planning, rather than educational, operations.

The Treasury is also watching the progress of the legal challenge. Ministers are reluctant to intervene in the Charity Commission's initial ruling providing it has acted within its powers.

The Independent Schools Information Service, which keeps statistics on the independent sector, estimates that about 5 per cent of the 500,000 children in private education rely on educational trusts. Anne Feek, chairman of SFIA, said: "We feel it is monstrous to impose what is effectively retrospective tax action on plan-holders."