It is now being predicted that, with the planned increases in university tuition fees, future students will leave university saddled with more than £50,000 of debt. Even with the higher limits before repayments kick in, few parents will feel easy about such debts hanging around their children’s necks as they embark on their careers. And with such debt hanging over them, how will these young adults manage to get started on the property ladder?
Parents (one or both of whom run their own company) have a tax efficient solution which can provide funds to support their children through the costly years at university and help them afterwards get started on the property ladder.
In broad outline, the solution involves simply the creation of a Trust for the benefit of adult children and the transfer to that trust, by way of a gift, of shares in the parent’s company.
Such transfers from a trading company can be made with no capital gains tax or inheritance tax charge arising.
Because the beneficiaries are adult children (rather than minors) the income arising from dividends declared via the trust belongs to the adult children (rather than to their parent). This allows them to benefit from their own personal tax allowance and lower rate tax band so that, in nearly all cases, they receive that dividend income free of any additional tax charge.
This is, of course, much better than if the parent instead retained the shares and received the dividend. Receipt of such a dividend is likely to give rise to an effective tax charge at either 25% or 36.1% depending on the parent’s level of total income.
The adult child can use the money to meet the increasing costs of university education and also to build up a sufficient nest egg to have a deposit to allow them to take that all important first step on to the property ladder.
If you would like to explore the possibility of setting up such an arrangement to help your adult children pay for university fees and get started on the property ladder, please contact Cormac Marum at Harwood Hutton. If your children are still teenagers, it is still worth looking at this strategy so that it is in place when your children reach 18.