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Reducing the Cost of University Funding

17 August 2012

coins for tax planning

After the joy getting those A level grades and their place at university comes the reality of paying for it.

The cost of funding children through university is set to increase dramatically from September 2012. The independent university guide, push.co.uk suggests that the average debt on graduation for students starting in 2012 will be £53,400, compared with £26,100 for 2011 starters.

In many cases this will probably be partly or entirely funded by parents. For higher rate tax payers, the gross cost i.e. the amount a parent has to earn before tax, and national insurance could be £2 for every £1 required.

What we hope to do here is consider the options available to reduce this tax burden.

If a parent’s income can be treated as that of their children’s, the tax burden can be reduced significantly or completely cleared. This can only apply where the child is 18 or over.

There are several means of reducing the tax cost of university funding:

1. Family businesses

Wage

If the child does or could do work in the parent’s business, then provided he/she is paid a market rate for that work then the above savings can be achieved.

Sponsorship

If it is the case that the course undertaken by the child is in relation to the parent’s business and it is in the course of that child’s employment then subject to certain conditions the cost of lodging, subsistence and travelling allowances can be met by the employing parent which will free of tax and national insurance up to a limit of £15,480 per academic year.

Dividends

Often the conditions for the above points cannot be satisfied. Where the parental family business is a limited company it is possible to pay the child’s university costs by way of dividend. Planning for this may require the setting up of a trust to hold the shares e.g. when the parent is not comfortable in the child directly having shares in their business at age 18.

2. Grandparents

Many grandparents may contribute to a student’s education. Each grandparent could gift up to £3,000 p.a. free of inheritance tax. Where the grandparents have surplus income then the amount that can be gifted free of inheritance tax can be greater than £3,000 p.a.

If the grandparents have shares in the family business these can also be used for dividends in the same manner as set out above with the important difference that the planning can be used for children under the age of 18.

3. Accommodation

The highest area of cost will probably be renting accommodation. This cost can be reduced by the parents or child purchasing their own property. If it is more than one bedroom, then the other bedrooms can be rented out tax free up to £4,250 p.a. to other students to cover the cost of the property. If it can be structured properly it is more tax efficient for the house to be owned by the child rather than the parents.

4. Offset mortgages

From 2012 student loans will be charged interest at a rate of up to 3% plus RPI inflation, according to the level of the student’s future earnings.

Many parents may decide to fund the loan themselves. Offset mortgages allow you to offset any savings against the cost of the loan. As interest on savings attracts tax, offset mortgages can be a tax efficient way funding students.

5. Offshore bonds

The income and capital growth on investments held with offshore bond wrappers do not attract tax until they are encashed. Five per cent of the amount invested can be withdrawn tax free each year and used to fund the child. Any amount over this 5% would be liable to income tax.

If the bond is assigned to the child then any withdrawal in excess of 5% would be treated for tax purposes as their income. If this, when added to any other income of the child, falls within their personal allowance of £8,105 then the withdrawal would be tax free.

haleys are able to assist with all of your queries on the subject of financing university costs. Please contact us on 01772 741200 to find out more.

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