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Use shares to support a student

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9th Sep 2016
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University students can easily accrue debts of £50,000 or more by the time they graduate, but this debt can be reduced or avoided by using a family company shares.

Universities in England and Wales currently charge up to £9,000 in tuition fees per year for their undergraduate courses, and most charge the maximum permitted. This cap is due to be raised to £9,250 for the 2017/18 academic year.

The standard tuition fee in Scotland is much lower at around £1820, and eligible Scottish students don’t even have to pay that. Students who are resident in Wales can receive a grant towards part of their fees. The student will have to fund their living costs at university, which will be around £9000 per year outside London, if they live away from home.

Loans

The Student Loans Company (SLC) will generally pay the tuition fees directly to the university, but the amount paid is added to the student’s debt held with SLC at start of each term. The student can also apply for a maintenance loan of up to £8,200 per year to cover their living costs, but the level of the loan provided will depend on their family’s financial position. This maintenance loan is added to the tuition fee to make up the full student loan managed by the SLC.

Interest 

The guide to terms and conditions for student loans makes it clear that interest is added to the student’s loan from the day the funds are made available. The rate of interest charged varies between the RPI (as set in March each year) and RPI+3%, depending on the individual’s circumstances.

Although the ex-student is not required to repay the loan until they start earning over £21,000pa or £17,495pa for a Plan 1 loan, the outstanding balance will continue to increase due to the accrued interest. Incidentally, the plan 2 repayment threshold of £21,000 will not be increased with inflation. Penalties are added to the loan if the borrower moves abroad and fails to tell the SLC of their new circumstances.        

If the borrower hasn’t paid off all their plan 2 student loan after 30 years of the date they became liable to repay, the balance including any interest may be written off.

Dividends

Where your client controls their own company, the shares of that company can be used to provide tax-free dividend income of up to £5,000 for the student, without using up any of the parents’ personal tax bands or allowances. If the student doesn’t have other income to set against their own personal allowance or their basic rate band, they could receive up to £43,000pa in dividends and pay tax at 7.5% on £27,000 of that income.

Shares

Such dividends can only be paid to the student if they hold sufficient shares in the company. The first step towards achieving this is to check how many shares are authorised and in issue. The company may need issue new shares to the current shareholders, perhaps as ‘B class’ to allow for flexibility in dividend payments.

The shareholder parent (or other relative) may then transfer shares directly to the student, or into a trust for the student. Where a parent is giving shares to their child, it is important that those shares are full ordinary shares which have the right to receive part of the company’s capital on a winding-up, and the child is aged 18 or over. These conditions are to avoid the settlements provisions applying, which could cause the dividends to be taxed on the donor. The gift of shares to the student should also be evidenced by a letter saying it is made as part of their “parental love and affection” for the student.

Capital gains

A gift of shares from a parent to their child is subject to CGT, based on the market value of the shares. The gain on a small value of shares may be covered by the donor’s annual CGT exemption (£11,100 for 2016/17).

If the company is a trading company the gain can be held-over using TCGA 1992, s 165. Likewise, the gift should be covered by business property relief for inheritance tax. These CGT and IHT reliefs won’t be available where the company is not trading (eg it’s a personal investment company), but the value may nevertheless be treated as a PET for IHT.

In an extended family other relatives such as uncles, aunts or grandparents, may consider giving shares in their own companies to support nieces, nephews or grandchildren through university.   

After graduation

When the student graduates from university, the parent 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.      

Tax returns

The student must understand the nature of the dividend income they receive, as they will have to declare it as part of their total income, if they need to claim a tax refund while at university.

Replies (24)

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By SE_Confused
12th Sep 2016 10:56

Doesn't the extra income affect the loans / grants they could get? I am not sure what is means tested and not.

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Replying to SE_Confused:
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By Rebecca Cave
12th Sep 2016 11:12

Grants no longer generally available for students in Englang, & possibly Wales. All finance is by way of loan.

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Replying to SE_Confused:
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By hiu612
12th Sep 2016 11:12

I think the point is that they do this because they already won't get grants, and want to avoid incurring £50k of loans. This essentially represents the family funding the education through the family company, and the author is illustrating a way for the student to suffer the tax on the income paying for that education rather than, say, the parents or grandparents suffering that tax.

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7om
By Tom 7000
12th Sep 2016 11:08

Sure and after graduation...crack on paying dividends for ever?

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7om
By Tom 7000
12th Sep 2016 11:09

If your parents are paying you dividends its unlikely youll get any grants due to teh family wealth ...btw

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By andrewbain
12th Sep 2016 11:23

Isn't there a risk that the settlements legislation could apply even for adult children? HMRC's settlements guidance refers to any family member - see below.

Income being transferred from the person making most of the profits of a
business to a friend or family member who pays tax at a lower rate.

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Replying to andrewbain:
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By Tax Dragon
12th Sep 2016 11:49

That quote is presumably taken from TSEM4325. And I wonder whether the previous comment about paying dividends forever was prompted by a similar thought: is there an argument that the shares retained by the parents are related property (s625(5)), in the sense that, were the new shares to cease paying disproportionate dividends after graduation, then their value would reduce, because it would pass back to the original shares still owned by the parents?

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By garethgreen
12th Sep 2016 11:32

Maintenance loans are not usually sufficient to cover all living costs, so most parents will be giving their child some money towards living costs (unless the child earns enough from part time work), whether or not they also want to avoid having a student loan. (For most students, it makes sense to take the maximum loan possible, whether or not the parent or student could manage without it, but that's a different topic, so let's not get diverted onto this.) This article is just saying that rather than receive dividends, pay tax on them, then pass net amount to child, better to give them dividends direct, so no income tax is paid. Good idea.

Maintenance loans are means-assessed, based on parental income (not wealth), unless the child is self-supporting. So, I suspect that if some dividend income goes direct to the child, it will reduce parental income, so could help to increase the amount of the loan, if parents are close to a threshold for increasing the maintenance loan.

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By Harrison88
12th Sep 2016 11:45

Just a note, under plan 1 the borrower has 25 years to repay before write-off.

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By Justin Bryant
12th Sep 2016 12:01

There is no reason why, with proper implementation, the settlements legislation in the link below would apply and potential CGT re non-trade companies and control concerns can be dealt with via s260 TCGA 1992 & trusts.
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-...

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Replying to Justin Bryant:
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By andrewbain
12th Sep 2016 12:19

Justin - just to be clear, are you suggesting that the only way to avoid the settlements legislation would be to involve a Trust? Thanks.

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Replying to andrewbain:
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By Justin Bryant
12th Sep 2016 12:24

No.

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By norstar
12th Sep 2016 12:27

Tax planning is all well and good but what happens when the child is 3 years in, drunk and bombing in their degree, and you want to stop paying the dividend to motivate them to sort themselves out? What about when they leave Uni - who forces them to sell?

Presumably using Alphabet shares would be better eg split parent shareholding of 100 shares into 90 A shares and 10 B shares, then transfer B shares ranking equally in all respects to child...

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Replying to norstar:
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By Justin Bryant
12th Sep 2016 12:29

Control concerns can be dealt with via trusts.

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By trotters
12th Sep 2016 17:15

I can't see any commercial reason for this type of transfer other than tax avoidance.
It would be very risky. I'd never suggest this type of false arrangement.

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By tbennett
12th Sep 2016 21:05

Why do the shares given the to student (assume student is 18 years +) need to be ordinary shares? Wouldn't irredeemable, non- voting preference shares be fine too? Wondering what I've missed.

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Replying to tbennett:
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By norstar
13th Sep 2016 17:26

Arctic systems turned on the fact that the spouse was given ordinary shares, which did more than receive income. They were entitled to full rights including voting, and participation in winding up. This related to a spouse but presumably, could be extended to other recipients in application. Sure I'll be corrected if not...

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Replying to norstar:
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By Tax Dragon
13th Sep 2016 17:56

You will be corrected. In Arctic Systems, HL concluded that there was a settlement, but it was between spouses. S626 provided an exception for outright gifts between spouses (and now civil partners too of course) so long as (condition B) the property was not wholly or substantially a right to income. Ordinary shares, as you say, did more than provide income. So the spouse exception applied.

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Replying to norstar:
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By Tax Dragon
13th Sep 2016 18:03

That said, you were of course indicating that ordinary shares would be less risky than tbennett's suggestion of prefs. I would agree with you, in that regard. Arctic perhaps shows that there is, even so, some risk.

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By AndyJG
14th Sep 2016 09:49

This is an excellent planning suggestion.

Two issues are bothering me but may well be manageable?

1) Is HMRC likely to invoke an income tax charge as outlined in ERSM60030 -Alphabet Soup?

2) Is this planning reportable under DOTAS?

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By DMGbus
15th Sep 2016 12:49

Sounds risky, but for those happy with the risks...

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

Most tax avoidance schemes simply do not work, and those who engage in them can find they pay more than the tax they attempted to save, once HM Revenue and Customs (HMRC) has successfully challenged them.

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When tax advisors devise alphabet share schemes &/or other artificial convoluted schemes one can start to understand why HMRC seem to have an unwritten / hidden agenda to cut tax advisors out of dealings beween taxpayers and HMRC. ... "Lunn" "NT Tax advisors" .. at the end of the day individual advisors will choose what level of tax avoidance / planning is acceptable to themselves / safe for ther clients (eg. low salary / high dividends) - whilst others will feel perectly comfortable going for more unconventional / untried / untested / risky schemes.

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By DRMJOB
08th Oct 2016 16:10

As a variation on the theme what about the following. A formal interest free loan is put into position for £X thousand pounds between student and relative (parent or grandparent) repayable after the course length and secured on the shares the student invests in. The investment is in stock exchange shares or say a FTSE 100 ETF such as ISF. The income is for the student and either tax free to £5000 or if greater covered by their personal allowance up to £11000. At the end of the course the loan is repaid and the student takes any capital gain with the loss either being borne by the relative or considered a debt (but much less than the equivalent student loan would have been). The arrangement does require there to be wealth in the family but it is a useful swapping of a high tax liability for the students probable nil liability. The interest free loan does not give rise to any tax charge but the potential debt write off needs IHT consideration.

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By Tax Dragon
11th Oct 2016 17:05

ITTOIA Pt4 Ch8?

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