UK: Counting The Cost Of University Education

Last Updated: 30 September 2011
Article by Daniela Glover

With many universities announcing plans to set fees close to the new £9,000 a year limit, some families are facing a huge bill for their children's education. If you're planning ahead to put your children through university you need to be aware of investment and tax issues, while keeping an eye on the economy and the potential impact on investment choices and returns.

Cash returns are unlikely to keep pace with university fees, so you need to invest wisely. You might consider the role that an effectively managed, diversified investment portfolio can play in aiming to achieve the required returns. This can be designed to meet specific requirements and invested in a mix of longer-term growth assets and shorter-term assets, which may allow for payment of fees at the relevant time. In spite of the well-publicised ups and downs, shares (which would be a typical component of the portfolio) remain an attractive asset for longer-term university planning and combating inflation.

Making a portfolio work as tax efficiently as possible is also a key part of the planning process and there are a number of tax-saving investments and savings vehicles that can be used, depending on personal circumstances and attitude to risk. Here are some options to think about.

National savings

These include Premium Bonds, National Savings Certificates and Children's Bonus Bonds, which are completely tax-free investments that can be cashed in when required. They are also Treasury-backed, so may be attractive to the riskaverse investor.

Individual savings accounts

You can accrue substantial ISA portfolios over time. Ideally, both parents should open ISAs to maximise tax-efficient saving – the new limit is £10,680 for this tax year – and they can be used as a source of capital or income. Cash ISAs are available to anyone over 16 provided they are UK residents, so consider investing on behalf of youngsters. The Government announced in the Budget that it is launching new junior ISAs, which replace the Child Trust Fund, although they will not benefit from Government contributions. These will be available from autumn this year and allow tax-free savings for children of all ages.

Qualifying investment plans

These are regular premium insurance policies, providing individuals with both an investment and life assurance element, normally established for ten years. You select the underlying investment funds, which are collectives managed by fund management groups.

Offshore investment bonds

These are single premium non-qualifying insurance policies which receive special tax treatment. You can make 5% withdrawals on a tax deferred basis while benefiting from 'gross roll up' on the underlying funds.

Venture capital trusts and enterprise investment schemes

These are at the higher end of the risk scale and, while they can form part of an overall strategy, should not be used in isolation as a means to save for education. Venture capital trusts (VCTs) provide capital to small and expanding companies with the aim of growing the business and generating a profit for the VCT. You can invest up to £200,000 per tax year and benefit from 30% income tax relief. In addition, dividends are tax-free and there is no capital gains tax (CGT) should the VCT be sold. There is, however, a minimum holding period of five years to qualify for the 30% tax relief. Enterprise investment schemes (EISs) invest in individual small businesses. Income tax relief is now 30% for EIS investments up to £500,000, with a minimum holding period of three years. This is due to increase to £1m and further changes are due to be introduced in April 2012. EISs also enable you to defer CGT.

Don't forget about tax

From a tax point of view, the first thing parents should do is minimise their combined tax bills by making full use of their tax allowances and lower tax bands. Assets held by married couples can be gifted from one to the other without incurring a CGT charge. It can be worth putting some income producing assets such as shares or cash deposits into your child's name; however, parents are taxed on the income from such investments if this exceeds £100 per year. If assets are gifted by others, for example grandparents, the child can now receive income up to £7,475 a year tax-free, making this a valuable tax mitigation opportunity. It may also result in IHT savings. Additionally, if grandparents pay fees on behalf of grandchildren or make regular gifts to children in anticipation of university expenses, they escape a future IHT liability, provided the grandparents are left with sufficient income to live on. Anyone can give away up to £3,000 per year without giving rise to IHT. Don't overlook the current difference between the rates of CGT (28%, or 18% for basic rate taxpayers) and income tax (40% and 50%, or 32.5% and 42.5% for dividend taxation, for higher rate taxpayers) as this can be a major influence on the choice of investments. Helpfully, everyone, irrespective of age, has an annual tax-free capital gains allowance, now £10,600. Even if parents gift or buy assets in their child's name which aim to generate capital gains rather than income, the child could sell them, making a capital gain each year of up to £10,600 without incurring tax on those gains. There are many tax issues to consider and we strongly suggest that you take professional advice on this.

Risk warning

Investment does involve risk. The value of investments can go down as well as up. Investors may not receive back in total the original amount invested. Past performance is not a guide to future performance.

There is no guarantee that VCT and EIS investments will qualify for, or continue to qualify for, tax relief. Tax breaks can be withdrawn and you may be required to repay any tax relief which you have received. VCTs and EISs can also prove difficult to sell. For these reasons, be sure to consult an adviser before investing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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