As soon as the summer holidays are here those back to school signs appear, reminding parents of all of the things that need to be purchased ahead of the next school term. The cost of putting children through their education can be significant , particularly when it is funded from after tax income. With effective tax and national insurance rates of up to 62 per cent, that’s an enormous amount of gross income needed. It could be more than double the actual cost.
How to get an A* in tax planning for next term
With careful planning, parents and grandparents can provide children with their own income stream to fund education costs and to help give them a head start in life. Advantage can be taken of the child’s own personal allowance (currently £11,000), savings allowance (£1,000) and dividend allowance (£5,000) before any tax is payable. Where there is doubt over whether the child is ready for the responsibility of direct ownership of assets such as shares giving rise to the income stream, trusts can be used to hold the assets, over which the parent or grandparent, as trustee, can retain control.
Parents can transfer income producing investment assets into a trust for the benefit of their adult children, and grandparents can do likewise to create a trust for the benefit of grandchildren of any age. This enables income produced in the trust to be paid to the children whilst reducing the donor’s estate for inheritance tax (IHT) purposes. The donor can also retain control over the investments.
Whilst the capital gains tax (CGT) implications and the limits on the amount of cash or investment assets that may be transferred by each donor free of inheritance tax would need to be identified and considered, available reliefs and allowances can be generous, meaning a suitable trust arrangement can often be created with little or no immediate tax cost.
The family company
Parents and grandparents who are shareholders in a family trading company can transfer shares in such a company, either directly or via a trust, to their children/grandchildren with no immediate tax consequences, due to the availability of both CGT and IHT reliefs when transferring business assets.
Personal investment company
Instead of holding investments personally, there are numerous advantages of using a personal investment company to retain and grow family wealth. Adult children could be shareholders and receive dividends from the company.
Parents are increasingly buying property for their children to live in while at university. It is important to review all the ownership options available before making a purchase. This will help ensure maximum post tax efficiency in terms of the investment return, both on rents received and on a future sale. Income from renting the property to other students can be used to fund a child’s education fees, but appropriate structuring of the ownership of the property will be important to ensure that a highly taxed parent is not taxable on the income, as well as ensuring that capital gains tax exemptions are maximised on sale.
Although school and university fees will have been paid for September, it is never too early to plan for the next term by considering how education costs can be funded tax efficiently to ease the financial burden for parents and grandparents. All parents should be aiming for an A* for tax planning in their next end of term report.
For more information please get in touch with Joan Foster, or your usual RSM contact.