Cash in on tax breaks for teenage children

SCOTLAND'S teenagers will this weekend be celebrating record exam results, with a Higher pass rate of nearly 80 per cent. But there will be no relaxing by the poolside for their parents this summer, who will have their peace and tranquillity disturbed by thoughts of the cost of university education, now confirmed by their offspring's success.

Those already feeling the pinch of rising prices, falling investment returns and tax hikes will not relish the prospect of finding the funds to finance living expenses for their young protgs. Gone are the days where teens were "off the books" at 18 and out into the world to fend for themselves.

Smart parents at least make sure the taxman chips in his bit. It is possible to keep your offspring afloat and cut your tax bill at the same time. Small gifts of up to 3,000 per annum can be made without inheritance tax implications, and regular gifting out of income remains a tax-efficient method of passing funds to younger generations. However, until your children hit 18, any income above 100 per tax year from assets or investments which you have transferred to them is likely to be taxed as if it was your income. As such, gifts made by grandparents to fund education often prove more tax-efficient.

While parents may be loathe to commit their much-needed excess cash to individual savings accounts (Isa) allowances, these are still a good bet from a tax perspective. The individual Isa allowance has increased to 10,680 for the current tax year. Indeed, if you saved the maximum allowance of 10,680 each April for 15 years and the fund returned 5 per cent per annum, you could amass a portfolio of around 230,000, since the Isa will grow without you paying income tax on the returns, unlike directly held investments.

Adult children aged 18 and over can invest in a full Isa, and those aged 16 and 17 can invest up to 5,340 each year in a cash Isa. Equally, those with children born between 1 September, 2002, and 2 January, 2011, will benefit from the Child Trust Fund, another long-term tax-advantaged savings arrangement for under-18s. Child Trust Fund contributions are currently limited to 1,200 per annum, although the Child Trust Fund is now to be replaced with "Junior Isas" which will be subject to a proposed annual limit of 3,000.

All of the above savings options require a bit of forethought and will be more relevant for those parents with offspring who have not yet hit teenage years. So what if your son or daughter is already embroiled in a summer of exam results and has one foot on the train to college or university?

Buying a house for them to live in is one popular strategy which, inevitably, has tax implications, including whether to buy it in your own or your child's name. If in your own name and you sell it in future you will pay tax on any gain arising, whereas if your child buys the house (potentially funded by you) and it is their only or main residence there should be no capital gains tax if and when they sell. This will also take the property out of the parent's inheritance tax estate, and any financial support you provide (eg mortgage repayments or bills) should be covered by inheritance tax exemptions.

If you are worried about giving your 18-year-old full control of a house, then you can look at joint ownership and more tailored structures (eg partnerships and trusts) to hold the house.

One point often overlooked by students is that they are also not immune from paying tax. Students with holiday jobs quite often forget this, particularly if the job is part-time and tax is, for whatever reason, not deducted at source.

If your child owns and lets out the student house, then they will pay tax on the rental income (less deductible expenses). However, if they live in the property and rent out a room to fellow students then a useful income tax relief is available called "rent-a-room" relief, which exempts the income from tax where it does not exceed 4,250 (gross) in a year.

Indeed, he or she may be able to add their personal allowance of 7,475 to the rent-a-room allowance to receive a total of 11,725 in rent before paying tax.

Ensuring that your children use their allowances and lower-rate tax bands, particularly if you are a higher-rate taxpayer, is good tax planning. Indeed, there is nothing to stop you from taking advantage of rent-a-room relief yourself, should you choose to rent out your child's room once they head off to university!

All decisions on tax-efficient investments must, of course, take into account the usual non-tax investment factors. Often, though, the peace of mind gained from saving to pay for education and knowing that your child has somewhere secure to live will override any tax considerations.

• Susannah Simpson is a personal tax director at PricewaterhouseCoopers in Scotland