The introduction of VAT on independent school fees is creating a uniquely severe financial squeeze for families in London, new analysis reveals. While the policy aimed to tax those with the 'broadest shoulders,' the reality in the capital is exposing a stark gap between asset wealth and disposable income, leaving many aspirational parents facing impossible choices.
The London Asset Trap
Since the tax change came into effect, over one hundred independent schools have closed across the UK, with approximately one in five of those situated in London and the surrounding region. In response, schools have increased fee assistance by 11.5 per cent, but the design of means-tested bursaries is inadvertently penalising Londoners.
These bursaries assess household wealth based on assets, not just income. In a city where nearly 11 per cent of homes are valued at £1.5 million or more—compared to just one per cent nationally—many families find themselves asset-rich but cash-poor. They may have bought their home years ago, seen its value soar, but have not seen a corresponding rise in their monthly salaries.
Stark Choices: Home vs. School
This disconnect has left numerous London parents with a brutal dilemma: withdraw their children from their schools or sell the family home to free up capital. The situation is exacerbated for those also facing higher mortgage payments due to rising interest rates, creating a perfect storm of growing equity and strained personal finances.
"Many parents choose independent education through hard work and sacrifice, not vast disposable wealth," the report notes. "The VAT hike impacts these families the most, and in London, the issue is magnified by geography and the housing market."
Financial Innovation Steps In
In response, financial services providers are seeing a surge in demand for products that help unlock wealth tied up in property. For instance, Selina Finance reported a threefold increase in the first half of last year in parents using Home Equity Lines of Credit (HELOCs) specifically to cover school fees.
This flexible finance option allows parents to pre-arrange a credit limit against their home's equity, drawing funds as needed for termly fees or extras. It provides a way to manage the increased costs without an immediate, drastic change in lifestyle, though it carries the risk of repossession if repayments are not maintained.
As housing demand continues to outstrip supply in high-value areas, the challenge of combining significant asset wealth with modest incomes is set to affect more families. Enabling them to leverage that asset wealth carefully may become crucial to ensuring their children's education continues uninterrupted.
