Many parents support their children financially through university. Parents who run their own companies may consider making grown up children shareholders in order to take advantage of the £5,000 dividend allowance and their children’s lower rate tax bands.
Sophie is 18 and at university. She will have to pay tuition fees of £9,000 per year, her rent at halls of residence is £7,000 per year and she is budgeting for food and other bills of £100 per week. It is assumed that Sophie will take the loan from the Student Finance Company to cover the tuition fees of £9,000.
If her parents decide to fully support her rent and other bills, their daughter could cost them £12,200 per year.
Sophie’s parents own their own company
- They re-arrange their share capital perhaps opting for different classes of shares
- They gift Sophie shares in the company, up to the value of their CGT annual exemption
- The board of director’s declares annual dividends to Sophie
There is a £5,000 dividend allowance where Sophie pays tax at 0% and Sophie has a personal allowance of £11,000. As such dividends up to £16,000 can be paid to Sophie without any personal tax liability.
This strategy means that parents do not have to fund university costs out of net of tax income.