Top independent schools are using their charitable status to help wealthy parents reduce their tax bills, it has emerged.
Some of Britain’s best known public schools are openly advertising the tax benefits available to parents who sign up to what are known as "advanced fee schemes".
Elite boys’ school Harrow (pictured), highlights the “tax-efficient” nature of its scheme which allows parents to pay a large amount of tuition fees up front. The website of the £33,285-a-year north London boarding school adds that it offers “attractive returns”, “tax-free”.
The plans are designed for families who can afford to pay several years’ fees – often more than £30,000 per pupil per year - to schools in a single lump sum.
The schools then invest the money. But because they are registered charities they do not have to pay tax on the interest earned, a bill for which parents would have been liable if they had invested the money themselves. Parents then receive their benefit from the tax-free nature of the investment from the schools through discounts in their fees.
Stowe School tells parents that it anticipates “rates of return of between 3 per cent and 5 per cent” for lump sums invested in its “fees in advance scheme”. The Buckinghamshire school, which charges boarders £30,975 a year, reassures parents that the money will be held “in a Trust which does not pay tax on its dividend and interest earning”.
Barnaby Lenon, chairman of the Independent Schools Council, was head at Harrow for 12 years before retiring in 2011. “Quite a number of schools have been doing this for many, many years," he said.
“I have been aware of it for at least 30 years. These schemes were introduced for the benefit of those parents who thought it was worthwhile but I don’t think the take-up has been very large.”
However £32,100-a-year Radley College reveals on its website that one in six of its current pupils is paid for through its “fees in advance scheme” adding up to a total of more than £17 million.
The Oxfordshire boys’ school tells parents that its scheme offers “competitive” discounts. “Funds paid into the scheme are invested in British government or other fixed interest stocks which guarantee both interest payments and capital redemption,” it explains. “As the College enjoys charitable status it does not pay tax on the interest received.”
It adds that: “This can be very beneficial when parents and others are assessed at the higher rate of tax.”
Such advanced fee schemes are offered by many other high profile top public schools, although their websites are less open about the tax benefits for parents.
Asked whether independent schools should use their charitable status to help reduce parents’ tax bills, Mr Lenon said: “That presumably is a matter for the exchequer.”
HM Revenue and Customs is clear that a charity is “exempt from UK tax on most types of investment income, including income from investments made overseas, as long as the income is used for charitable purposes only”.
Independent school charitable status has become increasingly controversial in recent years, with some suggesting they should be doing more public good to justify it.
William Richardson, Headmasters’ and Headmistresses Conference general secretary, said: “School fees are a major item in family budgets. This is one scheme of many ways in which parents are assisted with their fees, other ways also include means-tested bursaries.”
A Charity Commission spokeswoman said: “With regard to investment decisions, the parameters are: what is the best way of serving the furtherance of the charity’s purposes. The decisions of the trustees are only likely to be challengeable if they are not consistent with this.
“Our concern is that trustees fulfil their duty of prudence in managing their investments. 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.”