Using the family firm to reduce university costs
Sending your child to university will become even more expensive from September 2012 when most universities’ tuition fees will rise to £9,000 annually.
While tuition fee loans are generally available, there is a shortfall for maintenance costs. Grants are not available for households with income exceeding £42,600 and loans for living costs range from between just £3,575 and £5,500 per annum.
Costs for accommodation, travel and subsistence, not to mention books for study, are estimated at around £9,000 a year, which creates a funding gap of between £10,000 and £20,000 for a three year course – all of which must be paid from taxed income.
However, there are ways of funding this shortfall tax efficiently. Parents who run their own business can transfer shares in the family company to children over 18, enabling dividends to be paid directly to them. No tax is payable, provided the student’s gross income is less than £42,475 a year.
The gift must be outright, with no arrangement for the return of the shares, as this would trigger anti-avoidance legislation that would effectively treat the child’s income as the parent’s.
Despite the anti-avoidance rules, it is possible to pay dividends at the required levels and avoid higher rate tax. In addition, it would be possible to cancel shares transferred to the child at a later stage.
Working for the family
Although loans are available for tuition fees, many parents prefer their children to start working life free of debt. Parents often ask us whether their family business can pay off the tuition fee loan without incurring a tax charge and this is possible where the student returns from university to start working for the family business. As usual, though, there are strict conditions.
Firstly, the course must provide knowledge, skills or personal qualities that will be useful to the job that the graduate is about to start. This could cover a wide range of skills, for example problem solving skills developed during a physics degree could be applied in a wide range of positions outside the more obvious scientific roles.
Secondly, the loan must be repaid when the student is employed by the family company. HMRC takes this a stage further, requiring that the student should normally be employed by the company while the course is being undertaken.
Although there is currently little support for this view in case law or legislation, evidence of the link between the employment offer and completion of the course is essential. It may make sense for the student to be employed by the company while at university and work there during summer holidays, as well as for the business to make an offer of full time employment conditional on completing the degree course.
Assuming the conditions are met, the family business will obtain tax relief for the expense, and the reimbursement will be exempt from tax in the hands of the new graduate.