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

This is a freeview 'At a glance' guide.

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.  

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

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?

 


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