When and how a student repays their loan depends on when they started their course. For courses starting after 1 August 2023 students will be on Repayment Plan 5. See Student loans: a guide to terms and conditions 2023 to 2024 – GOV.UK (www.gov.uk)
The 2023 student loan changes may have left some university graduates (especially those not moving into high-paid jobs) with the burden of longer-lasting and more expensive debt as a legacy of their studies.
Key points from the 2023 rules
The changes in September 2023 to student loans included:
- The repayment term was extended from 30 to 40 years.
- The earnings threshold at which students start making repayments dropped to £25,000.
- The interest rate charged was set to match the retail price index. With the RPI reaching 13.5% in March 2023, the Government decided to cap the interest rate for all students and graduates and review it each month. As of August 2024, it stands at 8%.
Family members can help reduce their student’s or graduate’s student loan debt. Parents and grandparents who want to reduce the debt amount by helping to pay tuition fees and living costs have some options to consider.
MAINTENANCE
Although not strictly an exemption, gifts made for the maintenance of family members (i.e. spouse/civil partner, minor children, children in full-time education and relatives financially dependent on the person making the gift) are not treated as transfers for inheritance tax (IHT) purposes.
This means no IHT liability will arise if a parent contributes to the student’s living costs.
Making a gift
You can give someone £3,000 a year as a gift without tax liability. You can give more than that – but there may be a liability if you die within seven years.
NORMAL EXPENDITURE OUT OF INCOME
You can also make gifts from your income, which will be exempt from IHT, provided you have sufficient funds to maintain your usual standard of living after the gift. These gifts must be made on a regular basis, and a pattern of payments must be able to be demonstrated.
If a parent or grandparent’s income is high enough, this often underused exemption could be useful.
Using a trust
Another option for grandparents is to put funds into a trust for their grandchildren, which can then be used to pay fees. Trusts come with set-up costs and ongoing work to prepare accounts and annual tax returns, but they can be hugely beneficial for income tax, capital gains tax, and inheritance tax (IHT) planning.
Parents can also set up trusts for their children if they are over 18, although IHT is likely less of an issue in this case.
Personal loans
Parents or grandparents could also take out a personal loan to cover fees, which could be cheaper than the capped interest rate for student loans. Of course, the repayment term will be far shorter, and parents and grandparents should generally ensure that they don’t have to rely on their children or grandchildren for repayment.
Can we help?
Be aware the Chancellor has announced an Autumn Budget for 30 October 2024, and this may include changes relating to capital gains tax, inheritance tax and student loans.
At Shipleys, we can arrange for a trust to be created and provide ongoing guidance on this. There’s more on trusts on our website in these articles:
The Income Tax and Capital Gains Tax Benefits of Trusts
There’s also information on gifts in Ground Rules on Gifts – Inheritance Tax Myth Busters
If we can help, speak with your usual Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2024
Related Resources
Ground rules on gifts – inheritance tax myth-busters
Getting to grips with trusts
