Labour’s recent proposal to levy a VAT on private school fees has sparked intense debate. While the party argues it will make private education fairer and fund state schools, critics claim it could impact student diversity and school finances.
The UK’s private and independent schools remain highly attractive to domestic and international HNW families. In Henley & Partners‘ global ‘Opportunity Index’, which ranks destinations for HNWIs, the UK scored the highest in education.
In addition, a 2022 report by the Independent Schools Council highlighted that private schools generate £16.5 billion for the UK economy annually and support over 328,000 jobs nationwide. They also attract wealthy families from overseas who value Britain’s exceptional educational standards. As in the United States, education in the UK is big business.
VAT impact on schools and families
The predominantly affluent families who send their children to elite UK schools such as Eton and Winchester, where fees often exceed £40,000, are likely to absorb any VAT-related fee rises, while the schools themselves will also offset costs through various measures.
However, for lower and middle-income families making sacrifices to afford private education, these cumulative rises could limit access and diversity. School fees have increased considerably over recent years, way above the rate of inflation, so these proposed changes need to be seen as part of a bigger cost increase.
[See also: How much money would Labour’s proposed VAT levy on private schools raise?]
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Labour has rowed back on its initial proposal to remove private schools’ charitable status. Retaining this status will allow schools to claim gift aid on donations and shield profits from corporation tax. The schools themselves will also take steps to maintain access and profitability if the proposed levy comes into force. Strategies could include increasing overseas student numbers who don’t pay VAT, providing more means-tested financial assistance, or lobbying politicians extensively. Elite institutions like Eton have vast reserves to absorb short-term hits as well.
The risk of wider tax changes
Many families see a private education as an investment in their child’s future job prospects. In most instances, tax will not be a major consideration. As such, 20 per cent VAT on private school fees seems unlikely to deter either HNW families committed to a British private education or reduce the UK’s appeal as a hub of world-class schooling. However, additional tax changes on top of VAT-related fee rises could create a tipping point.
HNW individuals are highly mobile globally, seeking out favourable tax regimes and financially stable countries to base themselves and their families.
[See also: Why Labour’s VAT plan for private schools doesn’t add up]
For instance, reforms to inheritance tax reducing thresholds and exemptions as well as changes to non-domicile status, restricting eligibility and tax benefits, could influence decisions for some HNW families and individuals considering leaving the UK.
Combined, these tax changes present a very different landscape for HNW families used to preferential tax treatment in the UK. And paired with pricier private school fees, there are fewer incentives to remain in Britain over competitive jurisdictions like Switzerland, the US or Singapore.
Ongoing Brexit headwinds have already led to a net exodus of HNWI migrants from the UK, according to the Henley Private Wealth Migration Report 2023. And if wider markets perceive the UK as sliding towards a more anti-business, anti-wealth tax regime, associated impacts on inward HNW migration and capital flows could be significant regardless of private school fees.
Tess Wilkinson is the Director of Education Services at Henley & Partners
