Funding your child through university is very expensive, but if you control your own company you can use your shares to provide the student with £5,000 of tax-free income per year. If the student doesn’t have any other income they could receive up to £43,000 in dividends and pay tax at 7.5% on £27,000.
This income stream can only be achieved if the student holds sufficient shares on which dividends can be paid. Step one is to check what shares the company has issued, and if necessary subdivide the shares or have the company issue more shares.
You may transfer some of your shares directly to the student (who must be aged 18 or over), or into a trust for the student. The gift should also be evidenced by a letter saying it is made as part of their ‘parental love and affection’ for the student. Those gifted shares may be relabelled as, say, ‘B’ shares, so a different rate of dividend may be paid on them.
Any capital gains arising on the gift of shares can be held over where the company is trading. The gift should also be covered by business property relief for Inheritance Tax. If your company is a non-trading investment company, a different strategy may be needed.
When the student graduates from university, you or the company could buy back the shares from the student. Alternatively, the graduate could gift their shares to the next sibling who is due to attend university.
The student must understand the nature of the dividend income they receive as it will have to be declared when claiming any refund of PAYE from a part-time job.
Clarke Nicklin in an independent practice based in South Manchester which offers Accountancy and Financial Planning services to a wide range of businesses and individuals.
Scott Herbert (Partner)
0161 495 4700
Chelsea Maher (Marketing)
0161 495 4700