How can parents support their children through university and also save tax? It's a question many are facing for the first time as the 2011/12 university year begins.
The Clifton office of national accountancy firm Saffery Champness suggests that investing in residential accommodation for student children could allow parents to minimise income tax, generate capital growth, and pay their kids an allowance in a tax-efficient manner.
Partner Richard Cartwright explained: “Pay freezes and falls in asset values may mean that parents have less disposable income to fund a child’s studies – and the introduction of the 50% tax rate has been a further slap in the face for many.
“Correctly structured, an investment in residential property in a university town can do much to alleviate these pressures. Parents should consider purchasing a house and gifting 1% of the ownership of the property to their child. They can then enter into a partnership agreement allocating their child 100% of the profits stemming from letting the property. This income, which can be used to pay for fees and subsistence, will be assessed on the child. As the child is unlikely to have significant other earnings, this will result in zero or minimal tax.
“Any capital gains made on the property will also be assessed under the capital gains tax regime, resulting in a maximum tax rate of 28%. If the money were invested in an income generating product, it could be taxed at a rate of up to 50%.”