Claiming tax relief on university fees

Supporting your children through university is a priority for many parents. For business-owning parents, strategic tax planning can help reduce their costs. In this post we'll discuss how to make the most of claiming tax relief on university fees while supporting your child financially.

Overview

Not surprisingly many students rely on their parents to help with university costs. Take Ryan, for example. he faces tuition fees of £9,000 annually, halls of residence costing £8,500, and living expenses of £125 weekly. 

His parents choose to cover his rent and living expenses, costing at least £14,375 annually. With strategic planning this burden can be eased significantly.

Claiming Tax Relief via your Family Company

If you own a trading company you can appoint your grown-up children as shareholders. Therefore  Ryan’s parents rearrange their share capital to different share classes to maximise benefits.

They can then either gift him shares up to the value of their CGT annual exemption. Alternatively they could claim Capital Gains Holdover Relief to reduce tax  The company declared £20,700 in dividends annually to cover her university costs and rent.

By doing so, Ryan pays just 8.75% tax on dividends above his personal allowance and £500 dividend allowance. Meanwhile, his parents save a minimum of over £6,000 on higher-rate taxes annually. This efficient arrangement showcases the potential of claiming tax relief on university fees.

Furthermore, you could charge you children rent under the Rent-a-Room scheme. This offers the potential of receiving income of up to £7,500 tax-free annually. Ryan's parents applied this relief, turning rental income into tax-efficient drawings from their company. However as an alternative, you could sub-let their room during term time to further optimise income.

Tax planning post-University

After graduation, Ryan's dividend income impacts his student loan repayments. At this stage, the family should review their planning. Claiming tax relief on university fees remains valuable, but adjustments may be necessary to suit changing financial circumstances.

Alternative Options

Establishing a trust fund is another effective route for financial support. Grandparents can create trusts to help with education costs. Property or assets in the trust generate income, which is taxed at the trust rate. Beneficiaries can claim back tax if they’re non-taxpayers or in the basic rate band

However, HMRC's anti-avoidance rules limit this option for you gifting shares to your minor children. Although grandparents gifting shares to minor grandchildren avoid these restrictions, providing flexibility for family tax planning.

Equally important is to ensure  structured and compliant planning when claiming tax relief on university fees. Failure to do so will result in you falling foul of HMRC as in this recent tax case here.

Summary

You can employ various strategies to support your children at university whilst simultaneously reducing your tax bills. Family Investment Companies, rent-a-room relief, and trust funds are excellent tools for claiming tax relief on university fees. With case planning, you can ease the financial strain of higher education while staying tax-efficient

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