Student life has traditionally been a time when parents financially support their children. The costs of academic materials, living costs and a hearty social life all add up. Pagan Osborne provided The Scotsman with some tips on how parents can plan for the costs of higher education.
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partner and head of tax at Pagan Osborne, suggests:
• Funds could be gifted or, if parents do not want to gift outright, then funds could be lent to the student and the terms and any interest recorded by way of a simple loan agreement. Loans are popular where couples have more than one child and wish to ensure equality among their children, for example the eldest is at university but younger children still at school. By making a loan instead of a gift the financial position in relation to advances remains the same for all children. If assistance is given to other children in the future then loans could be written off or additional loans set up.
• Outright gifts can be sensible for inheritance tax planning by the parents, to reduce the value of their estates. The gifts may fall within the exemptions of annual exemption, small gifts exemption, or normal expenditure out of income and/or maintenance of family. Any amounts not qualifying for these exemptions will be treated as potentially exempt transfers and remain on the parent’s gift clock for seven years after the date of the gift.
• Student accommodation is a major factor to consider. If property is being purchased with the support of parents again the gift versus loan considerations need to be reviewed. Additionally, there are tax implications for whose name the property is taken in. If parental support is by way of a gift and the property is purchased in the name of the student and the property is the student’s main home then any gain on selling the property can be treated as exempt from capital gains tax purposes. Additionally there is a special income tax relief for rental income if other rooms in the property are being rented out, allowing up to £4,250 of rent to be received tax free. If the property is taken in the name of the parent(s) this rent would be subject to income tax on the parent(s). Parents need to bear in mind that any gift of cash or a property will pass ownership to the children outright giving them control and the ability to spend/sell as they wish.
• Much of the support that a parent can provide for their children at university comes from planning in advance. Teaching their children about budgeting and living costs, and encouraging them to improve their culinary skills while growing up can all help.
Also on the financial side, parents saving early in anticipation of providing support can help immensely instead of trying to find funds at short notice. Consideration should be made whether the savings are held in the name of the child or the parent(s) particularly considering control and tax. If the funds are in the name of the child they can choose how to spend the funds which could mean they disappear in Fresher’s Week! If the funds originate from the parent and are invested in the child’s name then, up to the age of 18, any income in excess of £100 will be assessed for tax purposes on the parent. However, for inheritance tax the clock will start sooner and regular saving is likely to make more use of exemptions such as regular gifts out of income and annual exemptions.
• Part of advance planning could also involve establishing a trust. Control can be given to the trustees as to when funds should be advanced to the student or a set age could be decided. Trusts are popular for protection. They allow families to provide for younger generations without the assets being transferred to the individual outright, until such time as the trustees see fit, or at a certain age.”