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Tony Wickenden: Student loans and FTBs- Planning for your kids

Tony Wickenden Tax Planning Technical Area

Two worrying pieces of news emerged recently for parents and grandparents. Having a good higher education and “getting on the home ownership ladder” are two important aspirations for the young. Both are becoming harder to achieve.

The tuition fees for higher education at universities in England have increased to a maximum of £9,000 per annum and, when added to living and other costs (including accommodation), you can easily be faced with an annual cost of £15,000 or more. That’s £45,000 for a three-year course – without factoring in inflation. Actually it’s probably more but that’s scary enough as it is, isn’t it? If you prefer “round” figures, well, go for £50,000. How scientific is that? “Not very” I hear you say as you encourage your children to consider practical/science-based courses. Apparently, there has been a definite increase for science as opposed to Arts-based courses. Just a thought.

Anyway, returning to the central theme, such is the increase in the maximum tuition fee that it has apparently exerted considerable upward pressure on inflation, pushing the CPI rate above 2.5 per cent. Those faced with the fees (parents or students) will be less concerned with the “macro” effect of the fee hike on inflation and more concerned with the impact on their own financial position. Student loans help and should perhaps be considered more as a commitment (by the student) to increased deferred taxation payable (at 9 per cent) on income in excess of £21,000.

Why? Well there is some evidence that there is a potential stigma to borrowing and debt in this context . Moneysavingexpert’s Martin Lewis makes the point that it can be liberating to consider the student loan for what it really is – deferred contingent taxation. In some circumstances the “loan” may not ever be repayable. OK, you probably wouldn’t choose those circumstances, eg not earning enough to trigger repayment or repayment at a level that would facilitate repayment in full , but the condition is a reality.

Even with this view of what the loan in practice is, parents (and grandparents) with a “neither a borrower nor a lender be” mentality may still wish to help with or fully fund this cost, in which case the earlier they start the better; and the more you can minimise tax outflow the greater the likelihood that the objective can be achieved.

The same goes for funding the increasingly demanding amount required as a deposit for first home purchase. Halifax’s “Generation Rent” report reveals that the average (yes, average!) deposit required for a first-time purchase in London is over £57,000, and £27,000 for the whole country. And if living in Camden is your bag (man) then you are looking at £145,000.

The need for family (usually parental/grandparental) help is overwhelming. And it’s something that many parents would want to help with if they could. So, based on the country average, for those parents looking to fund a deposit and a university course, we are looking at a present value of around £70,000 and more like £100,000 for Londoners.

In doing your sums you need to build in inflation, of course – running at over 2.5 per cent at the moment and fuelled by the very increase in tuition fees you might be funding for.

And don’t forget, parents, it might not end with the deposit. There’s also the strong likelihood of needing to be guarantors or joint mortgagees to access the borrowing that will inevitably be needed. That can bring its own challenges in relation to the need to actually secure a mortgage on that basis.

“It was all a lot easier in our day” say the parents and grandparents of today – and they are right.

There is, however, a real role for the financial adviser to play here.

Goal setting, investment selection, tax minimisation and the resulting creation of a bespoke, suitable plan for those parents and grandparents prepared to make the commitment will all be better achieved with the benefit of informed and experienced financial advice. Building a tax-effective higher education and first home purchase fund is not something that most consumers can easily do themselves – online or otherwise.

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Tony Wickenden is joint managing director of Technical Connection

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