Off to university?

23 August 2016

Karen Clark

With A-level results out and record numbers of students accepting places at university, students and their parents will be considering how to finance the costs.

According to the Sutton Trust, graduates owe an average of £44,000 when they leave university and this is expected to rise. Many parents will want to avoid their offspring racking up such debt which will no doubt affect their ability to raise mortgage finance in future, thus delaying even longer the time at which they fly the nest.

Some parents may be able to provide financial assistance for tuition fees, accommodation and living expenses but if this is paid for out of post-tax income, on which effective tax and national insurance rates of up to 62 per cent may have been paid, the gross income needed could be more than double the actual cost.

For those parents with their own trading companies, one avenue might be to transfer shares to the children, either directly or via a trust, provided each child is over the age of 18. This could allow each child to receive dividends for 2016/17 of up to £16,000 tax free and at a rate of 7.5 per cent above this up to £43,000 per annum.

For trading businesses, such planning can often be undertaken entirely free of any tax charges on transfer or issue of shares, with more limited planning possible for investment businesses due to capital gains and inheritance tax charges on  the transfer of shares and/or the value in the company.

Consideration could be given to creating a new class of share for each child although the shares must be full ordinary shares to avoid tax on the parent under the settlements provisions.

Of course there are other means of funding university costs, including transferring assets into trust for adult children with the trust income paid to the child. Capital gains tax charges may arise where assets other than cash are transferred and there are limits on the amount of cash or investment assets that can be transferred into trust tax free by each donor. Even if the parents do not own a trading company, personal investment companies could be used to hold and grow family wealth, with adult children being shareholders and receiving dividends in a similar way to the trading company scenario outlined above.

There is also a common misconception that students do not pay tax. Students do of course pay tax in the same way as everybody else but generally the level of their income from part time or holiday jobs is below their personal allowance. If, however, they are receiving dividends, trust income or income from other sources, this has to be aggregated with any earned income they have when calculating any tax liabilities. They may also need to start filing tax returns.

If children are going to a Scottish university, there may be implications for their tax residence status (and vice versa for students from Scotland going to English or Welsh universities). Although tax rates have not changed in Scotland this year, there are likely to be changes next tax year and there will be disclosure requirements if the student needs to fill in a tax return as a result of their dividend income.

If you would like any more information on this issue please contact Karen Clark or your usual RSM contact.