The cost of going to university and living away from home can come up to £20,000 per year. Because students usually don’t have enough time to get a decent job to cover their expenses, the bills often fall to Mum and Dad.
Mum and Dad are often higher rate taxpayers. Therefore, it will cost them £33,333 in gross earnings to fund that £20,000.
As a result, there is a strong incentive to put income in your children’s name so that they can access their lower rate tax bands which would otherwise be wasted.
Paul is going to buy an investment portfolio that will yield £11,850. He will be taxed on this income at his marginal tax rate of 40%, giving a net income of £7,110.
However, if he lends his funds to his 18 year old daughter to buy the investment portfolio, the income will fall under his daughter’s name. The income will therefore not be taxable as it is within her personal allowance. His daughter may also be able to benefit from capital gains tax exemption in the future.
This example is very simple and practical. It is quite common to see parents lend their children funds for a property in their university town. They can then use this property to earn rental income from fellow students and cover their living expenses.