When your children go to university, you may wish to financially support their journey into adulthood.
Many parents will need to be aware of the tax implications when fully financing their children’s fees, bills, and rent.
In this guide, we will discuss tax planning for university, and how you can find the most tax efficient solution to supporting your children as they move through university.
(3-minute read)
We will cover:
- The tax implications of supporting your childrens’ finances through university.
- How www.taxexpert.co.uk can provide the best tax planning for university.
Shareholders in your own company
Many parents support their children financially through university.
Parents who run their own companies may consider making grown-up children shareholders in order to take advantage of the £1,000 dividend allowance (reducing to £500 from April 2024) and their children’s lower rate tax bands.
Children under the age of 18 will not be applicable for this allowance, as outlined in the Settlement Anti-Avoidance provisions.
These provisions are put in place so that if a parent transfers income-producing assets to their minor child, the settlements legislation ensures the income is taxed on the parent.
This prevents tax avoidance through income shifting to minors, as they have much more generous tax bands.
Example Scenario
Yasmin is 18 and starting university in September. She will have to pay tuition fees of £9,000 per year, her rent at halls of residence is £8,000 per year and she is budgeting for food and other bills of £100 per week.
If her parents decide to fully support her rent and other bills (leaving her with a student loan to cover her tuition fees), their daughter could cost them £13,200 per year from their after-tax net income!
Family Investment Company
Yasmin’s parents own their own trading company, which is classified as a Family Investment Company (FIC).
A Family Investment Company is used as an alternative to a family partnership or trust.
Income and gains are subject to Corporation Tax rates, rather than Income Tax rates.
They gift Yasmin shares in the company, up to the value of their Capital Gains Tax (CGT) annual exemption.
They could alternatively claim Holdover Relief, which lets them delay paying capital gains tax until the new owner, Yasmin, sells the asset.
Rent-A-Room Relief
The parents also make an agreement to charge Yasmin rent for her room at home of £7,500 per year.
Rent-A-Room Relief allows homeowners to earn a certain amount tax-free from renting out furnished rooms in their main residence.
From 6 April 2016 rent-a-room relief is £7,500 per annum.
How to use these methods to reduce tax
In the Family Investment Company, the board of directors declares annual dividends to Yasmin of £20,700 to cover her university costs and home rent.
The arrangement means that Yasmin will pay tax at 8.75% on her dividends more than her £1,000 dividend allowance and any available personal allowance.
This arrangement potentially saves a higher tax-rate-paying shareholding parent £8,652 in tax per annum (based on 2023-24 figures).
Furthermore, their rental income from their daughter is effectively tax-free drawings from their company.
The alternative is not to rent a room to their daughter and sub-let her room during term time.
This would still allow the family to make use of the Rent-A-Room relief amount.
Summary
Considering financially supporting your child’s journey through university?
It’s essential to understand the tax implications, especially when covering their bills and rent.
Need guidance on these tax implications?
Get in touch with us at Tax Expert.
We’re here to guide you, ensuring you make the most of your investments while minimising tax burdens.
Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.
Sending an e-mail is simple too, just fill out this short form and we’ll get back to you!
Kind regards,
Ilyas Patel