Paying for University Fees in a tax efficient manner

Q. My 18 year old daughter is about to embark on her degree course at university and will be living away from home. Have you any ideas as to how we can help her to fund her studies and perhaps save some tax?

A. As you are about to discover, her university fees and even modest living costs are likely to be in the region of £20,000 per annum.

I am told that, as students are generally too busy working hard towards their degree, they will have little time to get a ‘proper job’ and earn some income of their own!

As in your case, a large part of the bill often falls to ‘the bank of Mum and Dad’. If you and your partner are higher rate taxpayers, it is likely to cost you in excess of £33,000 in gross earnings to fund that £20,000. There is therefore a strong tax incentive to try to put some income into your daughter’s hands. In this way she can make use of her tax free personal allowance and lower rate tax band which would otherwise be wasted.

For example if you were going to buy some investments which could yield around £11,850 (the 2018/19 personal allowance), then If you do nothing you will be taxed on this income at your marginal tax rate of 40%, leaving only a net income of £7,110 after tax.

Instead of doing this, if circumstances permit, you could lend sufficient funds to your 18 year old daughter to buy the investments. In this way the income will fall into your daughter’s hands but should not be taxable on her because it is within her personal allowance. Your daughter may also be able to benefit from capital gains tax exemptions in the future when the time comes to repay you.

These days it is also becoming fairly common to see parents lend their children funds to help to purchase a property in their university town. They can use the property to earn rental income from fellow students by sharing the house. This kind of planning should be considered by any parent who is about to fund their child through university.

The above examples are of course very simple and, in practice, planning can be carried out with a variety of assets and a variety of amounts.

It is however important to remember that this planning does not work with children under 18 as any income would be treated as your own.

As with all things tax, it does make sense to take good professional advice.