As a new academic year begins, families turn their attention to the rising costs of education. Whether saving for university costs or funding private schooling, early planning can make a significant difference. We are increasingly seeing grandparents and other older relatives who wish to help fund education costs of younger generations, easing the financial burden on their children, and undertaking Inheritance Tax planning at the same time. With the right planning, this can be an effective and tax-efficient strategy.
The cost of private and further education
For some families, investing in a private school education is a priority, with evidence showing that students from private schools often outperform national academic averages. However, private education comes at a significant cost – not only in terms of school fees, but also when factoring in uniforms, extracurricular activities, trips, and other associated expenses.
Private education fees were a hot topic of debate last year, after the Government’s decision to impose VAT on school fees from January 2025. The average cost of an annual independent day school place is around £18,500 per annum, and the imposition of VAT on fees only increases the financial burden on parents. In addition, recent reports suggest HMRC are reviewing cases where parents made advanced payments to schools, to determine whether these payments are also liable to VAT.
University education comes with a substantial price tag. Tuition fees are subject to a cap of £9,535 per year in the UK, which means a typical three-year degree could result in over £28,000 of student debt being accumulated for tuition alone. Additional costs, including accommodation, food, travel, course materials, and entertainment, significantly increase the financial requirement. While Tuition Fee Loans cover course fees, Maintenance Loans, which are means-tested based on household income, rarely cover the full cost of living. For the 2025/26 academic year, Maintenance Loans have risen by just 3.1%, leaving a widening gap that families often need to fill themselves.
For those starting courses since August 2023, student loan repayments only begin once earnings exceed £25,000 per year; however, interest applies to the outstanding balance, with the rate of interest linked to increases in the retail price index. This means that the debt does not erode over time due to inflation, which is the case with other debt, such as mortgage loans.
The burden on parents
Parents looking to help their children through further education may well find that this comes at a time when they may also be focusing on other financial priorities, such as retirement planning and maximising pension contributions. Balancing these competing goals can present a challenge; however, starting to save well in advance of a child entering higher education allows families to spread the cost over a longer period and potentially reduce the financial pressure later.
For longer term investments, leaving savings on cash deposit is likely to see the value of those savings erode in real terms. Choosing an investment strategy that reflects the investment time horizon and holds a diversified portfolio including global equities and bonds could generate higher returns over time, albeit investment risk also needs to be considered.
Tax efficiency should form an important part of the planning process. Sheltering investments within an Individual Savings Account (ISA) wrapper could provide tax-free growth and income. The exemption from Capital Gains Tax offered by an ISA can be particularly helpful when withdrawals are taken to cover fees that become due.
Help from older generations
Grandparents and other older relatives often wish to contribute towards school and university costs, both to invest in their grandchild’s future, while also reducing the financial pressure on the parents. At the same time, we are seeing many people actively consider the potential Inheritance Tax liability that could be due on their estate, particularly given the upcoming change to legislation that will mean that unused pension funds become liable to Inheritance Tax from April 2027. For older relatives, gifting money for the purposes of funding education costs can, therefore, not only help younger family members, but also reduce the potential liability to Inheritance Tax.
In these cases, it is important to carefully consider how best to help fund expenses in the most tax-efficient way possible. Annual gifts of up to £3,000 are typically exempt, but larger capital gifts may be subject to Inheritance Tax unless the donor survives seven years from the date of the gift.
The benefits of arranging gifts out of surplus income are often overlooked. These rules are not straightforward; however, if income earned by the donor is truly surplus to expenditure, regular gifts of surplus income could be a method of contributing towards the cost of education without concerns that the value of the gift could be clawed back if the donor fails to live seven years.
For more advanced planning, a Discretionary Trust, with the grandchildren as potential beneficiaries, could be an alternative way to build a fund to cover education expenses. Grandparents could settle funds into Trust when grandchildren are young and invest with the aim of growing the fund over time. Once grandchildren need funds for education fees, the Trustees can release funds tax-efficiently, to cover ongoing educational expenses as they arise. Discretionary Trusts have wider applications than funding education costs and can be a powerful tool for wider estate planning and protecting family wealth.
Start planning early
Whether covering the costs of university or private school fees, the best way to meet education costs is to start planning as early as possible. By putting a structured and tax-efficient strategy in place, you can help ensure that your children – or grandchildren – have access to the educational opportunities you want for them. For older generations, such planning can also have the dual benefit of reducing a potential Inheritance Tax liability.
Our experienced advisers can provide independent and holistic advice on how best to fund your family’s education expenses, and how to reduce a potential liability to Inheritance Tax. Speak to one of the team to start a conversation.
