University funding

University funding

Photo by Oky – Space Ranger on visualhunt

University fees and living expenses are not getting any cheaper and it appears that fees are here to stay.  Currently the average living costs of a year at university, outside of London, is c.£750pm or £9,000pa[1] and tuition fees are £9,250pa.  

As parents you need to decide whether you are going to help your children with these costs, or purely let them use student loans (which are not as expensive as is often thought).  There are obviously variations in between but personally, I like a combined approach.  Rather than offering to fund the whole university experience, you could offer to contribute a set amount and after that, it’s up to them to find the shortfall.   This approach helps teach your children the importance of budgeting but also gives them some self responsibility.  It may also be a motivation to avoid wasting years on a course that won’t provide much long term benefit as they themselves will ultimately be paying some of the costs involved.

For the sake of this blog I am assuming that you want to contribute towards your children’s costs.  Whether this is the full costs, just the fees, just living expenses or a combination is up to you.

One way of contributing is the money coming straight from your disposable income or from existing savings.  This approach may be appropriate dependent on your personal circumstances or if you have not planned for this expense.  If you are in this position and run your own company or provide services through you own company, you may be able to gift shares or employ your children and therefore provide them with an income via a salary or dividends through your company.  Tax advice should always be obtained if you want to consider this 

If you have young children and just want to put some funds aside to contribute toward potential future university education there are several options.  Which one of these is appropriate for you and your family depends on your own circumstances but here is a brief description of some of the most common approaches.

Junior Individual Savings Accounts (JISAs)

JISAs allow your child to accumulate savings up to the annual JISA subscription limit each tax year.  Currently the limit is £4,368 and it is due to increase by CPI each tax year.  The funds held in the JISA grow free of capital gains tax and income tax and can be invested, up to the annual limit, in an investment JISA or a cash savings JISA.  Which one depends on your risk profile and length of time before the funds will be needed.

It is worth considering that any funds held in a JISA can be transferred to an adult ISA at age 18, without using the adult ISA subscription in the year of transfer, but the funds can also be accessed by your child at that age.   

JISAs are an easy way to put funds aside, along with other family members, to provide a contribution toward university costs whilst also holding the savings in a tax efficient wrapper. 

Collective investment held via a Bare Trust

Another way to save funds on behalf of your children is via an investment account or fund that is then held via a bare or absolute Trust.  As Trustee you can make investment decisions, but the funds are held for the benefit of the child who can then take over the investment at age 18.  These operate similarly to a JISA but cannot be transferred to an adult ISA at age 18 without using some of the normal annual ISA subscription limit.

As the funds are not held in a tax wrapper as is the case with a JISA, any realised capital gains over the normal annual exemption could be subject to CGT and income is taxed at the child’s rates of income tax.  In reality, this is likely to result in very little tax being paid as your child will have their dividend and personal allowances.

ISAs

You could use your own ISA subscriptions to save funds for the future in a tax efficient way, but you may have already earmarked your ISAs for your own needs and objectives.

Offshore bond

If you have the ability and are considering investing a larger lump sum to be used in the future, either for your children or a combination of purposes, it may be appropriate to consider an offshore insurance company portfolio bond (OPB).  These enable the funds invested to grow free of UK income tax and CGT (some withholding tax may be paid) with income tax charged when funds are withdrawn, based on the gains made, so effectively tax is deferred.  Most OPBs are set up using lots of individual policies which can be assigned/gifted to your children from age 18, for no money’s worth.  Your children then own the policy or policies and when needed make a surrender with any chargeable gain tax being calculated with reference to their rates of income tax.  The income tax due may then be zero if within their personal allowance and savings rate tax band, or only 20% if they are basic rate income tax payers. 

You and your children have therefore benefited from the funds invested receiving income and any realised gains gross (no UK tax paid) whilst at the point UK income tax is charged, it’s at a lower rate then you yourself may pay.  

These are just four ways to put funds, which will hopefully grow, aside for your children’s university costs.  Obviously, there are other ways, including just putting money aside in a savings account.  How you decide to save for this aspect of your children’s future depends on your own circumstances and what level of risk you are prepared to take with the money set aside.  Whatever you decide we would suggest you seek independent advice and do consider student loans even if they are just used for flexibility over when and what savings to use. 

Depending on the prevailing political opinions at the time you reach this point in your children’s lives, you may find that the student loan scheme is changed or fees reduced but either way to have some funds put by is only going to increase your children’s choices. 

Cheers

Charles

[1] Source: Which? – Student budget calculator