By Graham Poles, private client tax partner, Armstrong Watson
Going to university and getting that first taste of independence is an exciting step for students.
There’s a lot to consider and parents may of course wish to support their children financially where possible.
If you have a child who is about to go to university, there are a few tax planning points you both may wish to consider:
Funding your children through university
Many parents plan to provide their children with an income so that they will not need to work or to minimise the need for them to take out a loan whilst they are at university. Usually, this income is paid out of your net income ie after tax.
However, if you own some income-producing assets, such as a share of the family company or investments, and you do not require the capital, it may be possible to transfer these assets into trust for the benefit of your children, who are over 18.
Structured correctly, this could allow any income received on these assets to be passed directly to your children, making use of their personal allowance and, potentially, their basic rate band in order to reduce the tax burden, on you, of this income.
Additionally, gifts out of normal expenditure – a regular gift, that is from your normal income and does not reduce your standards of living – are normally free of inheritance tax, and paying in a lump sum, and surviving for seven years can also be inheritance tax efficient.
Income Tax on student earnings
Many believe that students are exempt from paying tax; this is not the case. However, every individual can earn up to the personal allowance, currently £12,570, per year, before tax needs to be deducted.
If they work only during the holidays, they could end up with an incorrect tax code, which would result in Income Tax being deducted from their earnings. In this case, a tax repayment claim, form R40, can be submitted after the year-end in order to reclaim any overpaid tax.
Purchasing a student house
Finally, with the costs of student accommodation equating to a large proportion of their outgoings, you may be considering purchasing a property for your child to live in whilst at university.
It is important that you are aware of the tax implications of this. If purchasing in your own name, the 3% Stamp Duty Land Tax second property surcharge is likely to apply. In addition, on sale of the property, Capital Gains Tax would be due on any increase in value.
Purchasing the property in your child’s name could prevent this but would involve giving away the capital and your child would then be able to sell the property, without your knowledge, should they wish.
We can advise and assist you in setting up a trust, which would allow you to structure the purchase in such a way as to get the best of both worlds; allowing you to retain control over the property whilst being able to benefit from the reliefs available to your child.
Financial planning for university fees
If you’re able to plan ahead and make savings or investments before your child goes to university it can be beneficial. Our financial planning team also has some advice about the options you may wish to consider.
Parents looking to pay university fees for their children may want to either invest a lump sum, pay out of income, or set up a regular savings scheme to provide funds to cover future fees. There are several options available to help make fees more affordable, and they can be both tax-efficient and flexible.
There are a number of alternatives to cash savings accounts, however, these may mean taking on additional risk and you need to consider how much risk you wish to take with each investment.
Working out how best to invest for education fees involves determining your own attitude to risk, investment timeframe and how you wish to pay the fees.
Another option is using your annual ISA allowance, which permits tax-efficient contributions of up to £20,000.
The right advice will help to avoid unexpected tax consequences and will enable you and your child to focus on other things, such as the study versus socialising balance. If you have a child leaving for university this year and you’re considering supporting them financially, get in touch for more support.
If you have a child leaving for university this year and you’re considering supporting them financially, get in touch for more advice. Call 01768 222030 or email help@armstrongwatson.co.uk
