SCHOOL fees are expected to rise by a record 10% in September. The average fee for a private day school this year is £2,396 a term or £7,188 a year, according to the Independent Schools Council (ISC). For boarders, the average is £5,492 or £16,476 a year.

A 10% increase will push the average cost of a day school up to £2,636 a term or £7,908 a year. Parents whose children board full-time can expect to pay an average of more than £6,041 a term, or £18,123 a year, from September.

The rises follow an announcement by the Office of Fair Trading that it has launched an investigation into allegations of price fixing at some of Britain’s top public schools.

The cost of full-time private schooling for a seven-year-old, attending a day school from 7 to 12 and boarding from 13 to 18, could total more than £308,733 if average fees continue to rise at 10%. Even if they go up by a more modest 6%, it will still cost more than £230,000.

With the cost of private education rising so fast, it makes sense to take advantage of the most tax-efficient ways to save for your child’s education.

Most parents cannot afford to pay for school fees out of their income, so they rely on savings. They often start to put money aside as soon as their children are born. Many also turn to grandparents for help because they can take advantage of some valuable tax perks.

Gifts

If you die with assets of £255,000 or more, your heirs will be liable for 40% inheritance tax (IHT). Each grandparent can give up to £3,000 a year free from IHT to reduce the value of their estate.

Grandparents can also make contributions towards private schooling out of their income. The money is exempt from IHT as long as the payments are regular and do not affect their standard of living.

Further tax-free gifts, called potentially-exempt transfers, can be made above the £3,000 threshold as long as the grandparents survive for another seven years. So, if you made a gift this year and died in 2010, it would be tax-free. But any payments made between 2004 and 2010 could be taxed.

Trusts

It may be worthwhile as a grandparent to set up a trust. A bare trust is the simplest type. You automatically create a bare trust when you invest in shares or funds on behalf of a child.

Once inside the trust, the assets are treated as the child’s for capital-gains-tax purposes. Any profits will not therefore eat into your own allowance, which this year is £7,900. Any income generated counts towards the child’s own tax-free allowance of £4,615.

Grandparents should also consider an accumulation and maintenance trust. All income and capital gains arising within the trust are taxed at 34%, but are regarded as the trustee’s rather than the grandparents’.

As the child is likely to be a basic-rate taxpayer, he or she can claim a tax refund on the income paid out. Beneficiaries who are higher-rate taxpayers have more tax to pay.