Financially supporting your children by paying their university costs can prove to be very expensive if you’re a parent. Especially when you consider tuition fees, rent at the halls of residence, food etc - the costs soon mount up.
However there are several ways of funding your children’s university costs tax effectively.
Altering your existing share capital to fund university costs
Normally when you form your company it is more straight-forward to have just one class of ordinary share.
Once your company is up and running it’s possible to create a different class of share. However it’s important to check your company’s Articles to ensure this is allowed. (The paperwork will also be different if your company was formed before October 2009).
The new class of share can be set to have different rights or the same rights as those of existing shares. Typically, in a private company these different rights might relate to:
The directors could then vote a different dividend for each class of share. The different classes of shares are generally called A, B, C shares etc – hence they’re commonly known as ‘alphabet shares’.
You could therefore consider creating a different class of share and issuing these shares to your adult children. They could then take advantage of the current £5,000 dividend allowance (though this decreases to £2,000 from the 2018/19 tax year). This could be even more beneficial if you are a higher rate taxpayer and your children aren’t.
Gift shares to your children to fund university costs
If you don’t want to issue new shares, you could consider gifting existing shares to your children.
However you need to be aware that this could trigger a potential Capital Gain. In order to avoid any tax liability you should either:
Before you gift any shares you should check the company's Articles (and any shareholder agreements) to ensure that a transfer to a family member is permitted. If a transfer is not permitted then you will need to consider whether you are able to change the articles/agreement.
If there are any transfer provisions in the articles, ensure that you follow these. These may include giving notice to the other shareholders (if any).
It would also be advisable to put something into a short letter to the family member so that this provides evidence of your intentions.This is just in case it is required at a later date by HMRC. For example:
"Dear [name], I am making an outright gift of 100 ordinary A shares being 8% of my current shareholding in the company to you on [date]."
Finally, there’s some admin to complete. You'll need to complete a stock transfer form; finalise the gift by handing back your share certificate to your company; issue a new share certificate to your children; and update the company’s statutory books.
It is very important to mention that neither issuing a new class of shares nor gifting existing shares will work unless your children are over the age of 18. If they’re under 18 then HMRC can potentially treat any dividends received from your children’s income as your income and tax them accordingly.
You could also make an agreement to charge your son or daughter rent for their room at home of up to £7,500 per year tax free. For further details on the rent a room scheme see our blog here.
Any dividends paid to them could then be used to cover their university costs and this rent. Therefore, the rental income you receive is effectively tax-free drawings from your company.
Please contact us for further guidance.