Tax planning for university (parent's guide)

Tax planning ideas to assist you in funding your child's higher education.

This is a freeview 'At a glance' guide.

• 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 Income tax bands. 
• Many university students would like you to preserve a bedroom at home. Since 6 April 2016, rent-a-room relief is £7,500 per annum.

For example

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 will be costing them at least £13,200 per year.

Yasmin's parents own their own trading company.  

• They re-arrange their share capital, see Issuing different classes of share: family companies.
  • 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, see How to gift your shares to the family. 
• The parents also make an agreement to charge Yasmin rent for her room at home of £7,500 per year, see Rent-a-room relief.
• The board of directors declares annual dividends to Yasmin of £20,700 in order to cover her university costs and home rent.

The arrangement means that Yasmin will pay tax at 8.75% on her dividends in excess of 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). 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 to sub-let her room in term time. 

Leaving University

Once Yasmin graduates, her dividend income will count as income for the purposes of Student Loan repayments and the family may wish to reconsider their planning at that point in any case.

Alternative routes for funding

• The parents could establish a trust fund, once their child is 18. Better still any grandparents could create a trust fund with the aim of assisting in fees for education and development.
• Property or assets would be put into the trust to earn income. The trust will tax at the trust rate, however, the beneficiaries will be able to claim back tax if they are basic rate or non-taxpayers.

Children under 18

This arrangement will not work with minor children as the Settlement anti-avoidance provisions apply where parents gift shares to minor children. Grandparents with their own company can gift shares to their minor grandchildren and the rules of the settlement should not apply.

Cases

In Alan Nicholson v HMRC [2018] TC06293, the First Tier Tribunal disallowed a sole trader's payments made to and on behalf of his son as wages whilst at university: the expenditure was not 'wholly and exclusively incurred'. 

Useful guides on this topic

Family Investment Companies
What is a Family Investment Company? Why use a Family Investment Company? What is the tax treatment of a Family Investment Company?

Rent-a-room Relief
What is rent-a-room relief? When does it apply? What are the limits and restrictions?

How to gift your shares to the family
How can you gift your private company shares to members of your own family? What are the tax implications? What reliefs apply?

Do I pay a salary or dividend? 2023-24
This guide explores the tax-planning points and pitfalls of using dividends to create a tax-efficient pay package. 

Trusts & Tax Planning
What is a trust? How can trusts be used in tax planning? What are the advantages and what are the pitfalls?

Settlement anti-avoidance rules
What are the settlement anti-avoidance rules? How do these rules catch some common family tax planning? What are the rules for spouses and other family members?