UK Study Options is proud to partner with Spice Taxation Ltd to make UK taxation services available to our clients. We have asked Martin Rimmer, Managing Director of Spice Taxation, to write a series of articles on the UK tax implications of various scenarios.
In this first article, Martin explores some of the main tax planning issues and opportunities arising when parents, who remain expatriates, send their child to university in the UK.
Scenario 1 : Child only relocating to the UK
The Case Study
Paul and Lisa Manning are British and they live and work in Dubai with their two children, Amy and Alice. Amy (18) is shortly to begin a four year Undergraduate Degree in Neuroscience at Exeter University. Paul and Lisa have been abroad for over 10 years, are non-resident for UK tax purposes and have immediate no plans to relocate to the UK. They own a rented property in the UK which used to be their main home and they hold a portfolio of investments and pensions outside of the UK. Amy is looking forward to her first taste of independence and will be moving to the UK alone, living in halls for the first year.
The Impact on Paul and Lisa
From Paul and Lisa’s perspective, nothing changes. They continue to ‘test positive’ for non-resident status under the Statutory Residence Test – remaining liable to UK tax only on:
- Incomes arising from the UK (rental income, interest from bank deposits, dividends from UK companies and unit trusts etc
- Gains from the sale or gift of interests in UK land and property
- Professional earnings relating to duties performed in the UK which are not ‘merely incidental’ to those performed abroad
Paul and Lisa file tax returns to report their UK incomes and their movements to and from the UK. They also pay Class 2 Voluntary National Insurance Contributions.
When Amy moves to the UK nothing about Paul and Lisa’s tax position changes. They may spend a little extra time in the UK but, as Amy is aged 18, her becoming resident in the UK shouldn’t affect Paul and Lisa’s position at all, provided that they remain non-resident themselves.
That said, Paul and Lisa probably need UK tax planning advice more generally in respect of their UK assets, the many planning opportunities for tax planning which exist for them whilst non-resident and ahead of an eventual relocation to the UK and in the area of Inheritance Tax in the UK, to which their global estate remains exposed even whilst living in Dubai.
Amy’s Tax Position
However, Amy does become resident because of the amount of time she spends in the UK and because she has a home in the UK (the halls she will live in). The fact that her parents pay her costs in the UK does not create any kind of tax charge or reporting obligation on any of Paul, Lisa or Amy. The fact that the funding comes into the UK from Dubai does not create a charge to tax either in this case.
Tax and Succession Planning Opportunities for Amy
Paul and Lisa are keen for Amy to begin to acquire some investment and financial management skills. As a resident of the UK, Amy is entitled to invest up to GBP 20,000 per year into an Individual Savings Account – a type of investment account that generates income and gains which are completely exempt from Income and Capital Gains Tax. Amy can also contribute to a UK pension whilst she is resident, even whilst being a student. Although Amy can’t access the pension until she is 57 years old, Paul and Lisa want to encourage Amy to see the value of saving for retirement.
So, in addition to investing in an ISA for their daughter, they contribute GBP 2,880 per year (the maximum) to a pension scheme for Amy. HM Revenue & Customs adds GBP 720 (25%) to this on a tax-free basis, bringing the total investment to GBP 3,600. Paul and Lisa work with Amy to choose the investments for her pension and ISA. Amy is responsible for meeting with a financial adviser from time to time to monitor performance and generally get familiar with investing.
In year 2, Amy has to move out of halls. Recognising that this presents a good opportunity to start to pass some of their own wealth on to Amy as well as to instil some further financial management values, all three agree that Paul and Lisa will put down the deposit on a 2 bedroom property in Exeter, and that Paul and Lisa will also act as guarantor on an interest-only mortgage.
After some thought, they decide to purchase the property in Amy’s sole name but the deposit is rendered as a non interest-bearing loan repayable by Amy, with Paul and Lisa retaining a charge over the property for this amount. The reason for this is that a highly-indebted asset is less likely to be subject to a relationship squabble later between Amy and a future partner, especially where Mum and Dad (as well as the bank) have a legal charge against it.
Amy agrees to take responsibility for renting out the second bedroom, contracting with the tenant (a fellow student), collecting the rent, insuring the place, paying the bills and the mortgage and for providing a monthly account to Paul and Lisa on the financials. Paul and Lisa agree that they will match any profit, which will then be diverted into Amy’s ISA and pension. Paul and Lisa continue to cover Amy’s tuition fees and living costs.
Amy can receive up to GBP 7,500 of rental income from the letting of the second bedroom in her main home completely free of tax, in addition to her Income Tax allowance of GBP 12,570. Although no Income Tax is due, a calculation of the profit from the rental is still worth doing each year. The property is her ‘Principal Private Residence’ for Capital Gains Tax purposes, which provides valuable tax relief if she decides to sell the property later. Amy also makes a will, dividing her possessions evenly between her parents and younger sister. This is because she is a responsible adult with assets and financial responsibilities.
Martin Rimmer is head of Spice Taxation, an independent Singapore-based UK tax consultancy which focuses upon the needs of British Expatriates around the world and those who move to the UK or have financial interests in the UK. Spice Taxation offers a free exploratory consultation to all clients of UK Study Options, for which we are very grateful. In addition, Spice Taxation has generously granted a discount of 20% on Tax Advisory services to clients and contacts of UK Study Options.
If you wish to avail yourself of this, please quote discount code UKSO23.