It is a common belief that the largest financial commitment people make during their lifetimes is borrowing when purchasing a property.

However, for parents planning to educate their children privately, the cost of school fees can be a huge drain upon finances.

For some, there will be a large decrease in regular net disposable income if investments are not put in place early to relieve the potential burden.Where fees are due in the next year or two, there is very little chance to build up a capital sum in order to fund the costs.

There are a number of acceptable investments which can be used for the provision of school fees, but the overriding need is to plan ahead and to accumulate a capital sum which can then be drawn upon to provide the necessary payments.It is important for parents to calculate the estimated future fees using various assumptions, accounting for the level of current fees at the chosen school (if this is known), a conservative rate of growth for the investment of funds, and the possible future effects of inflation on the amount required.One method which has grown in popularity is the educational trust.

This requires parents to make a capital payment to the trust which, under the terms of a contract, will make specified fee payments over a prescribed period.It is usual for the trust to purchase an annuity from an established UK life office written on the life of the child.

The annuity funds the appropriate payments, normally in the form of a cheque made payable directly to the school, following instructions by the trustees.

This can be done almost immediately, or could be designed to pay fees due a number of years ahead.

It is important to check current annuity rates to see if they are competitive.Since the trust is for educational purposes, there should be no liability to tax on any income.

The income produced by the annuity belongs to the trust itself and not to the child or the person who made the initial capital payment.

Any further settlements into the trust should attract the same tax benefits if the trust applies its assets for general educational purposes.

However, the Inland Revenue may reserve the right to treat the payment of fees as income in the hands of the child where a plan is effected using the trustees of an existing settlement.Capital gains tax may become payable on any gain if a parent surrenders the scheme, or if the trustees pay the value of the scheme to the parent exercising their discretion under the trust deed.On death, the value of the trust will form part of a parent's estate for inheritance tax purposes where the parent reserves the right to recover the funds.

If the right is reserved by anyone else, he or she will be treated as having made a lifetime transfer every time fees are paid out, and the remaining value of the trust will form part of his or her estate for inheritance tax purposes.Any over-performance of the investments held within the trust can be used for extra curricular activities.

This could, for example, include school trips or music tuition, or could be used as a contribution towards the next term's fees.

Should the investments under-perform, then the parents will need to make up the shortfall from their own funds.Another type of scheme which may be considered is the composition fee or pre-payment scheme, which is operated by a number of well established schools.

Parents who alrea dy know at which school they wish to educate their children will need to contact the school to ask if such a scheme is in operation.

These schemes do not need to be run in conjunction with a life office and can normally be run on an individual basis if parents discuss figures with the school bursar.A capital sum is paid as a composition fee which makes up a fund from which future specified fees are paid.

The parents are then safe in the knowledge that the fees up to a certain date have been accounted for and do not need to worry about future investment performance or the fact that fees may be missed if they get themselves into financial difficulty.Some schools will make a calculation based upon the current fees and increase them for the coming years by, say, 3% pa.

Invariably, the sum required will then be discounted by about 5% to give the parents an incentive to pay now rather than later.

Some bursars then hold the sums paid in a separate deposit account which attracts a competitive rate of interest for the school.

It is important for parents to check what happens if the child does not eventually go to the school.The tax advantages of a composition fee scheme are worth contemplating.

The school, as an educational charity, will benefit directly from a composition fee scheme since no basic rate income tax will be payable.

Additionally, the difference between the basic and higher rate of income tax will not be charged to the parents.The payment of a composition fee will not be a transfer of value for inheritance tax purposes, and should the parent die while the scheme is in force, will not attract an inheritance tax charge.

However, if the composition fee is paid by someone other than the parent, say a grandparent, then it would be a transfer of value for inheritance tax purposes.A general point to bear in mind is that a change in government may affect the future charitable status of schools.

Since a child's education is currently a charitable purpose, any alteration would probably mean the abolition of these schemes since the tax advantages are likely to be removed.It is never possible to plan precisely for school fees since there are a number of unknown quantities in any future school fees calculation, such as future inflation and investment performance.

However, by planning ahead and combining a spread of suitable tax-efficient investments earlier rather than later, the majority of parents should be able to accumulate a lump sum in order to take advantage of one of the schemes outlined above.