With the average university tuition fees at £9,000 a year, many students who are about to embark on their university life will leave university with a lot more debt than their predecessors.
Solicitor, Jagat Shah, explains how parents and grandparents, keen to help prevent university-going children and grandchildren from racking up large amounts of student debt, can give financial support whilst reducing their estates for Inheritance Tax purposes.
The cost of tuition fees and repayment term?
Tuition fees are currently set at £9,000 per year and an average maintenance grant is £3,575 per year. If a salary of £25,000 per year is secured after leaving university the student loan can be paid off within 23 years and 11 months. This on top of ever increasing cost of living may mean that parents and grandparents may consider financially supporting their children and grandchildren respectively through their time at university.
Does financially supporting your child through university have Inheritance Tax implications?
If a child is in full-time education, parents can pay for rent, tuition fees and maintenance without there being any Inheritance Tax implications.
• To cover the child’s rent a parent can pay the landlord or agency by direct debit or standing order.
• Tuition fees can be paid direct to the university.
• A parent can transfer money into their child’s account for general living expenses on a monthly basis.
There is no set limit for maintenance money; however it needs to be considered a reasonable sum to cover things like food, bills and spending money. If it is excessive, HMRC may deem that there is a ‘gift’ element, and this could have Inheritance Tax implications.
Is there a limit to how much money you can give your child?
Everyone can give away £3,000 each year, to whomever they like, without any tax implications.
Then you have what are known as Potentially Exempt Transfers (PETs). This creates the ability to give any amount you want, and it is tax free so long as you live for seven years or more from the date of the gift. If you do not survive seven years from the date of the gift it will be taken into account when calculating your estate.
Rather than giving money, you may choose do buy a property for your child to rent out or live in (or both) while they are at university. If you survive for seven years or more, there are no tax implications with this. You are not able to receive any benefit from this property yourself. If, for example, you live rent free in a property you have bought for your child, then this ‘gift’ is no longer exempt from Inheritance Tax.
What if you already own a property that you would like to pass on to your child?
It is more complicated to pass on a property you already own, as there may be Inheritance Tax and Capital Gains Tax implications. In this case, it is best to seek professional advice.
Is there a way to protect your child’s property from unforeseen future circumstances, such as financial difficulties?
Yes – by purchasing a property (or putting money) in trust, as long as the value or amount is less than £325,000. (This is £325,000 per giver, so two parents could together give a house up to the value of £650,000.)
Buying a property in trust for your child means he or she is the beneficiary, but the property is managed by trustees. This affords a degree of protection if your child ever encounters financial difficulties – for example, it may not be claimed if they get knee-deep in debt later in life. Also, it may provide protection from any claim by a spouse or civil partner as part of any future divorce settlement.
A property in trust can also benefit more than one individual. For example, a family with two children attending the same university can benefit both offspring with one trust.
Can grandparents financially support their grandchildren in the same ways?
Unlike parents supporting their children, there are Inheritance Tax implications when financially assisting grandchildren.
But there are several ways in which they can help:
• Grandparents can give ‘small gifts’ up to the value of £250 free of tax to each grandchild every tax year. However, it isn’t possible to give more than £250 and claim the first £250 is a ’small gift’.
• They can give away £3,000 every tax year (to any person they like) free of Inheritance Tax.
• They can also make gifts of any amount, tax free, so long as they survive for seven years from making the gift.
• The trust option, referred to above, is also available to them
A provision that can be particularly relevant to grandparents is the giving of surplus income: if an individual has income surplus to their requirements – for example, they have a monthly income of £3,000, but they only spend £2,000 – they can give away the balance of £1,000 free of Inheritance Tax.
The conditions here are that the giving must be of a regular nature to some degree – monthly, bi-annually or annually etc – and the person making the gifts must be able to maintain a normal standard of living without recourse to capital.
If grandparents can assist in this way it is very important that they keep detailed records as HMRC will want to see evidence of income and expenditure.
This is also a way of preventing the grandparents’ capital building up, and so reducing any future charge to 40% Inheritance Tax.