Property advisory firm Gerald Eve’s partner Richard Moir reviews the implications and opportunities in real estate for independent schools from the business rate and VAT changes

The government’s tax policies and their effect on independent schools have been much discussed, with VAT on school fees in the limelight, as well as the elimination of business rate charitable tax relief for independent schools in England.

All these measures will present significant challenges to parents with children in private education, as well as those running independent schools while trying to maintain standards of excellence. Still, it’s not all bad news, since some positive VAT measures may make investment in schools and school buildings more attractive.

Managing and understanding real estate assets will be at the core of solutions to ameliorate the impact of these changes, from reducing business rate liability to optimising their ability to generate income, cutting costs and unleashing their true potential.

Business rate changes and minimising liability

From April next year, all charity-operated schools in England are expected to lose their charitable relief from business rates. In Scotland, business rates on independent schools have been fully levied for several years, while private schools in Wales still retain their charitable relief.

Around 50% of private independent schools in England have charitable status and currently receive an 80% reduction on their business rate liability. For these schools, losing charitable relief makes it more important than ever to review their business rate assessments.

With the removal of the charitable business rate relief in England next year, it’s crucial that independent schools act now, ensuring a correct rateable value from which tax is calculated, so as to minimise their tax liability.

The Uniform Business Rate has been frozen since 2020. But, for the financial year 2024-25, increases were reinstated. For England, the standard rate has had an inflationary-linked increase of 6.7% to a level of 54.6p, while the small business rate remains at 49.9p.

Many independent schools successfully appealed against their business rates based on the 2017 Rating List (1 April 2017 to 31 March 2023), following a new national valuation scheme negotiated with the Valuation Office Agency (VOA) by the leading business rate advisory firms.

A new set of rateable values took effect on 1 April last year, with the values increasing again. Schools should start – if they have not already – examining and challenging their rateable values set by the VOA, via the government’s ‘Check, Challenge, Appeal’ process. There is currently no deadline to start this process for the 2023 Rating List in England and Wales, which is anticipated to remain open until 31 March 2026. However, given the potential complexities, it’s best to start as soon as possible.

Rating experts can often challenge the way in which the VOA has reached its valuations and there are a number of different valuation approaches available to rating practitioners.

Most large independent schools have been valued on the contractor’s basis, whereby the cost of the land, plus the cost to construct the buildings situated on the land, equals the worth of the property. Such ratings have seen material increases since 1 April last year. In certain locations there is some evidence of valuations based on how much it would cost to rent a property being used for schools. Other valuation methods, such as the income and expenditure-based approach used for hotels, cinemas and pubs, whereby the figure is calculated on “fair maintainable trade” – the trade that a reasonably efficient operator can achieve – may become more appropriate in circumstances where the changes to rates relief and VAT make schools significantly less profitable. 

Significant changes to a property or its surroundings can constitute a Material Change of Circumstance, potentially affecting its rateable value and business rate liability. Additionally, VOA records might not be up to date, and updating them could have either positive or negative effects. It is also important to note that Improvement Relief allows qualifying building extensions completed after 1 April this year to be excluded from rates for one year. Furthermore, while the details are still being worked out, legislation was passed last year to create a ‘duty to inform’, which in time will require ratepayers to update the VOA with changes to their estate which lie outside of the scope of any challenge to the underlying assessment.

 Optimising real estate assets – VAT advantage

Independent schools across the UK will be closely examining how the introduction of VAT on school fees will affect demand and pupil numbers. They will also be assessing the extent to which they can reduce operational costs – looking at pupil-staff ratios, specialist offerings, and potentially outsourcing some support functions, while also continuing to provide a high-quality, differentiated service.

Sadly, some – particularly charity – providers will also be questioning the cost of offering bursaries to support less wealthy families and asking whether they can afford to share teaching and other resources with the state sector, which their VAT status had, until now, supported.

Many schools are already considering more strategic options. Unfortunately, some closures are inevitable. Indeed, at Gerald Eve, we are already involved in the sale of several school properties vacated this summer. However, in greater numbers we are also supporting the necessary consolidation within the independent schools sector, which will lead to more and larger groups, bringing efficiencies through economies of scale and enhanced expertise through pooling central and support services.

There is a market for those looking for or being pressured to an exit. We are marketing and progressing the sale of schools as a going concern to both UK and international school groups. In a similar vein, we are seeing an increase in charity school mergers, driven by the need for security through scale, cost-sharing and skills-sharing. For these mergers to work, it’s crucial that property assets and any potential liabilities are carefully evaluated; the potential for a charity merger is enhanced if the underlying property asset adds to the downside risk mitigation for the dominant charity.

On a more local level, this new environment means that individual schools should focus on maximising the use of their real estate assets to generate additional funds, supporting both their charitable status as well as commercial viability. Additional revenue streams could include renting out school spaces during evenings, weekends and holidays for activities like evening classes, kids’ clubs and events such as weddings, retreats and film locations. Of course, optimising returns requires schools to reconsider all aspects of their operations and assets that might yield financial benefits.

On a slightly longer timescale, Labour’s pro-development policies could potentially create opportunities to capitalise on underused or surplus parts of school estates, particularly if they are considered grey belt and suitable for housing development in the future. In any event, schools would benefit from being aware of and engaged with emerging national planning policy framework and Local Plan policy direction in their areas.

The government’s decisions will push independent schools to act more commercially like any other business and they must adopt a businesslike approach to their property management, from limiting business rates liability to development and maximising the use of their property (or sweating assets). There are few easy wins, but the mindset must be to take the necessary actions where needed – sooner rather than later.

While many schools may have put building projects on hold, the need to continue investing in school facilities to attract pupils and parents remains constant. Schools will soon have the opportunity to benefit from VAT recovery, which could make some projects more viable. It’s also expected that VAT will be recoverable under the Capital Goods Scheme – broadly on VAT-bearing building projects over £300,000, supported with appropriate paperwork and completed in the past 10 years.

So, it’s expected that the stronger schools and groups will remain resilient through this turbulent period and there will be opportunities to grow, diversify and support some of the more challenged stand-alone institutions. Utilising real estate assets will be a core element of their success and will underpin decisions and availability of funding.

Despite these challenging times, the outcomes of independent schooling continue to be highly sought after, and the strong reputation of a UK education endures. Consolidation within the sector is inevitable and brings potential benefits, offering opportunities for those willing to take bold steps to succeed and grow, and offering longevity particularly for those smaller schools in competitive markets.