University fees and living costs can come to £20,000 per annum. As students are generally too busy working hard towards their degree they have little time to get a proper job and earn income of their own (sarcasm) and therefore the bill often falls to Mum and Dad. Mum and Dad are often higher rate taxpayers and so it will cost them £33,333 in gross earnings to fund that £20,000. There is therefore a strong tax incentive to put income in their children’s hands so that they can access their lower rate tax bands which would otherwise be wasted.
Bill is going to buy an investment portfolio which will yield £11,850 (coincidentally the 2018/2019 personal allowance!). If he does nothing then he will be taxed on this income at his marginal tax rate of 40%, giving a net income of £7,110.
Instead of doing this he could lend funds to his 18 year old son to buy the investment portfolio. In this way the income will fall into his son’s hands but will not be taxable because it is within his personal allowance. The son may also be able to benefit from capital gains tax exemptions in the future.
This strategy does not work with minor children because any income is then revisited on the parent, although there are ways of structuring things so that income accrues before age 18 but becomes taxable afterwards.
The above example is very simple and in practice planning can be carried out with a variety of assets and a variety of amounts. It is fairly common to see parents lend their children funds for a property in their university town which they can use to earn rental income from fellow students. This kind of planning should be considered by any parent who is about to fund their child through university.
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