Helping your child get higher education is one of the best investments you can make for your children. With universities on average costing an eye-watering £9,000 per year, there is a need to see ways which can help you save money.
Paying without tax strategies
If you are a business owner and wish to pay for your child’s university, you must pay yourself more or get more out as dividends. Let’s assume you are already paying yourself £100,000 per year.
Gross pay: £100,000
Employee PAYE: £29,946
Employee NI: £5,520
Employer NI & Pension contributions: £15,000
So in real terms, your company ends up paying £115,000 which in turn gives you only £64,534
To pay the university fee of £9,000: You will need to part ways with £16,000 gross income.
Paying with tax strategies
Business owners can use a couple of methods to fund their child’s university.
- Family investment companies (FICs)
- Trusts
Family Investment Companies (FICs)
A Family Investment Company (FIC) is a private company whose shareholders are typically family members. FICs are established to manage and protect family wealth, offering a strategic way to transfer assets to future generations while maintaining control over them.
How FICs Work:
- Formation: Parents (founders) transfer cash or other assets into the company in exchange for shares and/or loans.
- Share Distribution: Shares can be gifted to children, which can be a tax-efficient way to transfer wealth. If the donor survives for seven years after the gift, it is exempt from inheritance tax.
- Control and Flexibility: Parents can retain control through voting shares, while children can hold shares that entitle them to dividends. This structure allows for the management of income distribution and asset protection.
FICs are particularly beneficial for families with significant wealth, providing a flexible and tax-efficient vehicle for succession planning.
Trusts
Trusts are legal arrangements where assets are managed by trustees for the benefit of beneficiaries. They offer a way to control and protect family assets, making them a popular choice for funding education.
Types of Trusts:
- Bare Trusts: Assets are held in the name of a trustee, but the beneficiary has the right to all the capital and income at any time if they are 18 or over.
- Discretionary Trusts: Trustees have the flexibility to decide how to distribute income and capital among beneficiaries. This type of trust is useful for managing assets for beneficiaries who may need financial support at different times.
Tax Benefits:
- Trusts can help reduce inheritance tax liabilities and provide a structured way to manage and distribute assets according to the settlor’s wishes.
Comparing the two
Without tax strategies: Real cost per year £16,000
With tax strategies: Real cost per year £9,000
Depending on the number of years, it will save you £28,000 of hard-earned money.
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