Going to university and getting that first taste of independence is an exciting step for students. There’s a lot to take on board, and parents often wish to support their children financially where possible.
If you have a child who is about to go to university, there are a few tax planning points you both might consider:
1. Funding your children through university
Many parents plan to provide their children with an income so that they will not need to work or to minimise the need for them to take out a loan whilst they are at university. Usually, this income is paid out of your net income i.e. after tax. However, if you own some income-producing assets, such as a share of the family company or investments, and you do not require the capital, it may be possible to transfer these assets into trust for the benefit of your adult children. Structured correctly, this could allow any income received on these assets to be passed directly to them, making use of their personal allowance and, potentially, their basic rate band, in order to reduce your tax burden.
Additionally, gifts out of normal expenditure – a regular gift, that is from your normal income and does not reduce your standards of living - are normally free of inheritance tax, and paying in a lump sum, and surviving for seven years can also be inheritance tax efficient.
Purchasing a student house
With the costs of student accommodation equating to a large proportion of their outgoings, you may be considering purchasing a property for your child to live in whilst at university. It is important that you are aware of the tax implications of this. If purchasing in your own name, the 5% Stamp Duty Land Tax second property surcharge is likely to apply; this is up from 3% in 2024. In addition, on the sale of the property, Capital Gains Tax would be due on any increase in value.
Purchasing the property in your child’s name could prevent this, but would involve giving away the capital, and your child would have legal control to sell the property, without your knowledge, should they wish.
A trust arrangement can offer a middle ground, allowing you to retain control over the property whilst benefiting from the reliefs available to your child.
2. Income Tax on student earnings
Many believe that students are exempt from paying tax; this is not the case. However, every individual can earn up to the personal allowance, currently £12,570, per year, before tax needs to be deducted.
If they only work during the holidays, they could end up with an incorrect tax code, which would result in Income Tax being deducted from their earnings. In this case, a tax repayment claim (form R40), can be submitted after the year-end in order to reclaim any overpaid tax.
Planning ahead to cover university costs
If you’re able to plan ahead and make savings or investments before your child goes to university, it can be beneficial. Our financial planning team also has some advice about the options you may wish to consider.
Parents looking to pay university fees for their children may want to either invest a lump sum, pay out of income, or set up a regular savings scheme to provide funds to cover future fees. There are several options available to help make fees more affordable, and they can be both tax-efficient and flexible.
There are a number of alternatives to cash savings accounts, however, these may mean taking on additional risk, and you need to consider how much risk you wish to take with each investment.
Working out how best to invest for education fees involves determining your own attitude to risk, investment timeframe and how you wish to pay the fees. Another option is using your annual ISA allowance, which permits tax-efficient contributions of up to £20,000, though this is set to change in 2027.
The right advice will help to avoid unexpected tax consequences and will enable you and your child to focus on other things, such as the study versus socialising balance. If you have a child leaving for university this year and you're considering supporting them financially, get in touch for more support.
If you have a child leaving for university this year and you're considering supporting them financially, get in touch for more advice. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
