Parents should try and reduce the financial burden on new students by adopting some simple tax efficient practices, claims KPMG.
As students face even higher financial demands as they go off to university, thanks to top-up fees, many will look to parents and grandparents for help with costs through allowances, trusts or in some cases even buying a house.
But KPMG says if they are considering doing this, parents and grandparents should look at the tax consequences and make sure they plan ahead so their financial help isn’t restricted by Inheritance Tax (IHT) if they die within the next seven years.
The firm says a monthly allowance paid by standing order should normally be exempt from IHT because it will either be classed as a “disposition for the maintenance of the family” or as part of the payer’s normal expenditure.
But if neither exemption applies, the £3,000 annual IHT exemption may be available, which as this is per person, means parents could gift their child up to £6,000 a year without being hit by IHT.
Alternatively Carolyn Steppler, tax director at KPMG, suggests the use of a family trust which could help with a regular allowance or lump sum.
As the student is likely to be a lower rate taxpayer, depending on the trust used and the type of income issued, KPMG says they could be able to reclaim some of the tax charged as a tax credit.
For example in the case of a discretionary or accumulationa dn maintenance trust there is a tax charge on the trust of 40%, and if it then makes an income payment there is another charge of 40%, but depending on the individual circumstances students could claim some of this tax back as a tax credit.
KPMG says capital payments from family trusts could also be made, although it says the donor party would have to take advice on whether the changes to IHT on trusts, following the March Budget, would mean the payments would attract an additional IHT charge.
Finally Steppler suggests the biggest way to help new students is if possible to buy them a house in their university town, as if it grows in value the student can sell it while claiming the main residence exemption which means any profit will be exempt from Capital Gains Tax (CGT).
In addition owning a house would mean the student could earn additional money by letting out rooms, with any income up to £4,250 exempt from tax under the ‘rent a room relief’.
And under this scheme if the rental receipts exceed £4,250, the student is allowed to deduct either £4,250 or the actual expenses related to letting the rooms, whichever is higher, from its rental income in order to minimise their income tax bill.
However if a student rents out more than one room, the main residence exemption will be restricted depending on how much of the property is let, however the student could still qualify for ‘private letting relief’ which is the lowest figure between £40,000, the overall gain or profit from selling the property, or the amount of profit which is eligible for the main residence relief.
KPMG’s tax planning tips come at a time when research from engage Mutual Assurance reveal parents are having to financially support their children past the university years and in some case past the age of 25.
A survey of 2,200 adults by engage’s Three Generation Britain (3GB) research index shows almost half of parents with children over the age of 25 are helping them to cover basic living costs, with 46% of parents whose children live away from home, and 42% who share their home with their grown-up offspring having to bankroll their kids in the last six months.
Engage Mutual assurance says the survey findings reveal an emerging dependent generation of over-25s who are ‘Banking on Mum and Dad’ (BOMADs) to cover living costs ranging from childcare and debts to buying a first home.
Over the last six months 24% of parents have helped to cover the costs of running their child’s home through financing deposits, mortgages or home improvements, while 22% have provided money to off debts.
But as many older children n begin to start their own families, 11% of parents have found themselves helping to pay for childcare facilities, while 5% are still funding their child in further education.
Karl Elliott, 3GB spokesperson for engage Mutual Assurance, says as parents are now on average paying around £18,000 to help children buy their first home, the research reveals a huge shift in responsibilities across the generations.
Elliott adds: “In modern Britain, grown up children are not only turning to parents for one off handouts, but support for everyday expenses well into adulthood. This news should send clear messages to parents of younger children about the importance of saving little and often in the early years, to spread the impact on the family budget and to ensure their child’s needs don’t affect their future independence.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till