While loans, and the resulting debt, are one option, Jeff Salway suggests better ways to cope
Thousands of young Scots will be embarking on their new lives as students over the coming weeks – and for many parents it will be the culmination of years of planning.
Further education has never come with a greater financial burden, particularly for those leaving home.
From the parents’ perspective, it’s not just about helping their children through the years as students.
There’s also the matter of ensuring they don’t come out at the other end with a mountain of debt that will hobble their finances for years to come.
One in six Scottish students says they don’t have enough money to meet their monthly outgoings. Another 42 per cent say that, while they can just about keep their finances on an even keel, money is tight.
The research, from Bank of Scotland, also found that three-quarters of students in Scotland expect to leave university with debts, 39 per cent of whom think they’ll be in the red to the tune of at least £10,000.
It all adds up to extra stress both for students and parents.
Kevin Garfagnini, director at Mazars Financial Planning, said: “The prospect of sending a child to university can be incredibly stressful, but by planning well in advance and following some simple guidance, the burden can be considerably lessened.”
It may be a little late to offer anything other than practical help and advice if you’re waving a child off to university over the coming weeks.
But there’s more you can do if you’re hoping to fund younger children through education over the next few years – and the earlier you start planning, the better.
GIFTING
Simply gifting money directly to a child would seem to be the easiest step, on the face of it, although it’s not always the most practical. If you don’t want to gift money outright you could lend it, setting out the repayments in a simple loan agreement.
This maybe the best approach if you have several children and want to ensure they all get a fair deal.
“By making a loan instead of a gift, the financial position remains the same for all children,” said Fiona McDonald, tax partner at Pagan Osborne. “If assistance is given to other children in the future then loans could be written off or additional loans set up.”
Gifting money directly has its advantages though, most notably in reducing the value of your estate and potentially helping your inheritance tax (IHT) planning. That’s because the money gifted could qualify as an annual IHT exemption or a “small gifts” exemption, or be deemed a normal expenditure out of your income, said McDonald.
“Any amounts not qualifying for these exemptions will be treated as potentially exempt transfers and remain on the parent’s gift clock for seven years after the date of the gift,” she added.
TRUST FUND
You may prefer to pass on a sum of money while retaining some control over it. One option here is to put the funds into a trust. Again, there are tax advantages to this, as Garfagnini pointed out.
“Any type of investment can be held within a trust, therefore tax efficiency and the correct risk profile can be achieved for any set of circumstances,” he explained. “When the time comes to remove funds from the trust, the child’s personal income tax allowance can be used to ensure a tax efficient exit from the trust.”
Control can be given to the trustees, who decide how much of the funds can be passed on to the student and when. Alternatively, the age at which it’s advanced can be established at the outset.
“Trusts are popular for protection,” said McDonald. “They allow families to provide for younger generations without the assets being transferred to the individual outright, until such time as the trustees see fit, or at a certain age.”
CASH SAVINGS
The best known savings scheme aimed at children is the government’s junior individual savings account (Jisa). Up to £3,600 can be saved tax-free each year into a Jisa, although parents who previously opened a child trust fund – which Jisas replaced last year – are barred from opening one of the new accounts.
The money can be saved in a cash account or invested in a stocks and shares Jisa – or split between the two – provided the total doesn’t exceed £3,600 each tax year.
When the beneficiary turns 18 the money can be rolled into an adult Isa or it passes straight to the child. “Consideration should be made whether the savings are held in the name of the child or the parent(s) particularly considering control and tax,” said McDonald. “If the funds are in the name of the child they can choose how to spend the funds – which could mean they disappear in Fresher’s Week.”
You may prefer instead to save for your child’s education in your own Isa to retain control over the money. Child savings products are also available from banks, building societies, NS&I and friendly societies, which offer accounts into which you can invest up to £25 a month tax-free. Watch out for the £100 rule though. This stipulates that money saved in a child’s name by an adult is taxed at the latter’s rate if interest earned on the money exceeds £100 in a tax year.
INVESTMENTS
It’s worth considering stock market investments if you have ample time in which to generate funds for your child. The earlier you start, the more your money can grow while smoothing out volatility.
For example, if you’d invested £50 a month in the average investment trust over 18 years until the end of last month – £10,800 in total – you’d have ended up with £21,869, according to the Association of Investment Companies. An investment of £100 a month over the same period would have produced an eventual pot of £43,738.
Investment trusts and unit trusts can’t be opened under the age of 18, but you can open one for the purpose of education funding and add your child’s initials to the name of the account holder.
Isas and Jisas are the most tax efficient way to invest for children, although as Garfagnini noted, offshore bonds can also help shelter investments from tax.
“Based offshore, investments within the wrapper grow tax free, other than for small amounts non-recoverable withholding taxes,” he said.
“Segments of the investment can be assigned to the child each year for encashment and within the personal income tax allowance, which currently stands at £8,105, would be tax free.”
If you opt for market-based investments, do your homework first. Understand exactly what you’re investing in, how much you’re paying and the level of risk you’re taking.
PROPERTY PURCHASE
Some parents may view a property as a mutually beneficial way of helping their kids. On one hand, students face rising rents and later, after leaving education, a formidable challenge in even getting close to a foothold on the property ladder. On the other hand, low savings income, uncertain markets and modest house price falls make property investment appealing right now for those with cash to spare.
There are potential tax advantages too.
“If parental support is by way of a gift, the property is purchased in the name of the student and the property is the student’s main home then any gain on selling the property can be treated as exempt from capital gains tax purposes,” said McDonald.
You can also claim tax relief on rental income of up to £4,250 a year if other rooms in the property are let out.
McDonald added: “If the property is taken in the name of the parent(s) this rent would be subject to income tax on the parent(s). Parents need to bear in mind that any gift of cash or a property will pass ownership to the children outright giving them control and the ability to spend/sell as they wish.”