Tax Implications of Funding Studies Abroad
For many around the world, the falling of leaves from trees marks the end of summer and the inevitable start of the academic year. Every year, as students of all ages return to their studies, those from abroad face a number of additional considerations if they, and their families, are to avoid the tax traps and pitfalls that can accompany studying in a foreign country.
Show Me the Money
The first question is where the money to meet any fees will come from. The best way to answer this question is to ask your tax adviser what the tax consequences will be of meeting school fees. For parents of minor children (those under 18 in most jurisdictions, although this can extend to those under 21 in some countries), payment of their school fees may trigger a tax liability for the parent in the jurisdiction of study. This is most often the case in jurisdictions with specific anti-avoidance rules that catch payments of otherwise untaxed foreign-source income or gains when they are used in that jurisdiction for the child’s benefit, especially if the parent is also a tax resident in that jurisdiction.
If a family trust is paying the fees, consider asking the school or other educational establishment to invoice the trust directly. An invoice addressed to the parents, paid by a trust, may result in a tax charge if the parents are deemed to have received a trust distribution and that distribution carries tax consequences. Invoicing the trustees avoids any inadvertent distribution being made to a parent. This is particularly recommended where the parents are higher-rate taxpayers in the jurisdiction of study.
Home from Home
Many families like to purchase houses, either for the family — especially where the students are minor children — or for the children themselves, in the case of university students. Any purchase is likely to trigger property taxes of some description and these should be investigated before any property is bought. Alternatively, the family may look to find other regular accommodation in the jurisdiction of study (for example, rental property).
In addition, prolonged presence of a supervising adult in a jurisdiction may be sufficient to bring them within the tax net of that jurisdiction. It may also act as a connecting factor for family members attempting to remain tax resident outside that jurisdiction. In the UK, for example, the presence of a spouse and minor children, and the availability of accommodation, are both connecting factors for the statutory residence test.
Buying a property will also bring the owner within any local estate or capital taxes on death, sale, or other disposal (such as gift). It may be worth considering renting a property, at least in the short term, or considering other holding structures to mitigate this potential future tax liability. Again, this is something to discuss with your tax advisor before purchasing real estate in a foreign country.
Something Left to Live On
For university students, in particular, parents may wish to provide cash to fund their child’s living expenses. Care should be taken, since any gift from an individual could have estate or gift tax consequences in the home jurisdiction.
If a family trust will provide additional cash to the student abroad, advice should be taken from a local advisor to confirm whether there will be tax implications for the student of that distribution in the jurisdiction of study. In some circumstances, a loan may have a better tax outcome than an outright gift from either an individual or a trust.
There is no one-size-fits-all approach to funding study abroad. The tax implications will be determined by the rules of the home jurisdiction and the jurisdiction of study. Since every jurisdiction has its own set of rules, regulations, and anti-avoidance measures, tax may be triggered in the most unlikely of scenarios and it is vital that advice is taken early in the process so that the position is planned for appropriately.