University tax planning guide for Parents

It is that time of year again when parents are sending their children off to university. There’s a lot to consider and parents may of course wish to support their children financially, where possible.

Parents who run their own companies may consider making grown up children shareholders in order to take advantage of the £2,000 dividend allowance and their children’s lower rate tax bands. The dividend allowance reduced to £2,000 from £5,000 from April 2018.

Many university students like to preserve a bedroom at home. From 6 April 2016 rent-a-room relief is £7,500 per annum.

For example:

Peter is 18 and starting university in September. He will have to pay tuition fees of £9,000 per year, his rent at halls of residence is £8,000 per year and he is budgeting for food and other bills of £100 per week.

If his parents decide to fully support his rent and other bills (leaving him with a student loan to cover his tuition fees), their son could cost them £13,200 per year.

Peter’s parents own their own company.

  • They re-arrange their share capital.
  • They gift Peter shares in the company, up to the value of their CGT annual exemption, they could alternatively claim hold-over relief.
  • The parents also make an agreement to charge Peter rent for her room at home of £7,500 per year.
  • The board of director’s declares annual dividends to Peter of £20,700 in order to cover his university costs and home rent.

The arrangement means that Peter will pay tax at 7.5% on her dividends in excess of his £2,000 dividend allowance (or £5,000 allowance prior to April 2018) and any available personal allowance.

This arrangement potentially saves a higher tax-rate-paying shareholding parent £8,170 in tax per annum (based on 2019/20 figures). Their rental income from their son is effectively tax-free drawings from their company. The alternative is not to rent a room to Peter and to sub-let his room in term time.

Children under 18

This arrangement will not work with minor children as the settlement anti-avoidance provisions apply where parents gift shares to minor children.

Need more information?

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