Have you considered buying a property for your children going to university?
September will see children heading off to university. It is for many a rite of passage that combines a first-class education, a taste of independence and, of course, a lot of fun.
And with the average price of student accommodation at £148 a week for halls of residence and nearly £200 a week for a studio and rising substantially in London, wealthy parents are exploring the option of buying a home for their child and renting out spare rooms. It can prove a canny investment whilst helping children onto the property ladder.
But it is not a step to take without first considering the tax implications for the parents and future impact on your children.
Parents and their children will need to give careful consideration to how the property is purchased an owned as that will shape future tax liabilities. For example, a property that is an outright gift may be beneficial for inheritance tax but will leave parents with no control over how the use is managed. If purchased and owned by Mum and Dad it may attract a higher rate of stamp duty.
There are a number of taxes that need to be considered.
If as parents, you buy the property in your own name, then any income generated by letting out (are you going to charge your children rent, or just letting the spare room) will be taxed on you at your marginal rate of income tax.
If you buy the property in your child’s name, the income then belongs to them, and is taxed on them. It is possible that this income will be below their tax free personal allowance (£12,500) when added to any other income they might earn (temping jobs whilst studying perhaps) and would therefore not result in any tax.
If they do have other income, they may still escape income tax on the rents, under the Rent-a-room relief rules. If they let out a room in a property that they are living in, and the rents for the year are below £7,500, then they can claim relief and pay no income tax on those rents.
Stamp Duty Land Tax (SDLT)
Purchase of residential property can be subject to a variety of rates of SDLT, depending on the circumstances.
Currently, until 30 June 2021, there is a reduction in the main rate of SDLT on the first £500,000 of value. No SDLT would be due on a property worth up to £500,000 if it is the first property owned by the purchaser or replacing their main home. Until 30 September, no SDLT will be due on the first £250,000, and thereafter it reverts to the normal rules of SDLT being paying on property over £125,000.
Assuming parents already own a property, a purchase of a second property would attract a 3% surcharge. If we assume however that the children have never owned a property before, they would not attract this additional surcharge.
Once the temporary reduced rates no longer apply, it may still be possible for your children to pay no Stamp Duty on properties on properties worth up to £300,000 (and reduced rates on properties worth up to £500,000) under the first time buyer relief rules. As the name suggests, it is only available to individuals who have never bought or owned a part share in a property.
Capital Gains Tax (CGT)
If the parents decide to purchase the property themselves, then it would not be their main residence (unless they want to live with their children at Uni!) and as such any future sale would attract CGT on any gain at 28% (assuming the parents have income over £50,000).
Purchase the property in the name of the child going to Uni, and it is their own property. The property will be their main residence due to the time they spend there, however if there was any uncertainty due to them spending some time back with parents, an election can be made to name that property as their main residence. This means that the gain relating to the time that they live there as their main residence can be relieved under the Principal Private Residence Relief (PPR).
New rules from April 2020 have clarified lettings relief (under the PPR rules) will give relief where part of the home that you are living in is let out to others, so the fact that you let out a room to a fellow student will not negatively impact on your CGT position.
Inheritance Tax (IHT)
Buying a property as parents, and letting your child use it whilst at university will mean that the value of the property remains in the parents’ estates for IHT purposes.
Purchasing a property in the names of your children would be treated as a potentially exempt transfer for Inheritance Tax purposes. This means that the cash used to purchase the property would be treated as a gift to your children, the value of which leaves your estate for IHT purposes, once you survive seven years after the gift. The value of the property would be in the estate of your children, including any increase in value, rather than remaining in your estate.
Part of the university experience is, of course, make and living with new friends, but here too caution is needed.
Simply renting a room to friends will not automatically create a tenancy agreement, meaning that renters will have very few rights to remain in the property. It is helpful to have a formal agreement stating the rent to be paid, contributions to utilities and council tax, and when the agreement ends.
However, if your child is not living in the property, perhaps on a student placement or overseas study period, it may be that those renters automatically gain a shorthold tenancy and with it certain rights and protections. Advice should be taken.
In many cases, it would appear that there is a benefit in all of the taxes mentioned above in property being purchased in the child’s name. However, this comes at a price, losing control of assets of significant value to young adults. Another method of purchase could be jointly you’re your children, or as trustees. The taxes above would all need to be considered under these routes.
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