Have you considered buying a property for your children going to university?

Children will begin their university careers in September. It is a rite of passage for many since it combines an excellent education, a sense of independence, and, of course, a lot of fun.

And, with the average weekly cost of student accommodation at £148 for halls of residence and nearly £200 for a studio in London, wealthier parents are considering purchasing a home for their child and renting out spare rooms. It can prove to be a prudent investment while also helping children gain access to the property ladder. However, this is not a decision to take without properly considering the tax implications for parents and the long-term impact on your children.

Parents and their children must carefully assess how property is purchased and owned, as this will affect future tax liabilities. For instance, while an outright gift may be efficient in terms of inheritance tax, it leaves parents with no control over how the property is managed. If the property is purchased and owned by Mum and Dad, it may be subject to a higher rate of stamp duty. Numerous taxes must be considered.

1. Tax Implications
2. Tenancy considerations

Tax Implications

Income tax

If you own the property in your own name as parents, all rental income generated (whether you charge your children rent or simply rent out the spare room) will be taxed at your marginal rate of income tax. If you purchase the property in your childs name, it becomes their income and is taxed accordingly. This income will likely fall below their tax-free personal allowance (£12,570) when combined with any other income they may make (temping jobs while studying, for example), and hence will be tax-free.

If they have additional sources of income, they may still escape the rental tax under the Rent-a-room relief regulations. If they rent out a room in their primary residence and the annual rents are less than £7,500, they can claim relief and avoid paying income tax on the rents.

Capital gains tax (CGT)

If the parents want to purchase the house themselves, it will not be their main residence (unless they wish to live with their children while attending university). And as such, any future sale would be subject to CGT at a rate of 28 percent on any gain (assuming the parents earn more than £50,000).

Purchase the property in the childs name who is attending university, and it becomes their property. Due to the amount of time they spend there, the property will be their main residence; but, if there is any doubt due to their time spent with their parents, an election can be made to declare that property as their primary residence. This means that they can deduct the gain from the period they live there as their primary residence under the Principal Private Residence Relief (PPR).

New guidelines effective April 2020 have confirmed that lettings relief (under the PPR rules) will apply where you rent out a portion of your property to others. Therefore, renting out a room to a fellow student will not negatively impact your CGT situation.

Stamp duty land tax (SDLT)

Until 30 June 2021, the main rate of SDLT on the first £500,000 of value was reduced. No SDLT would be payable on a property valued up to £500,000 if it is the purchaser's first property or is replacing their main residence. SDLT is not payable on the first £250,000 until 30 September, at which point it reverts to the normal rules of SDLT being payable on property exceeding £125,000.If parents already own a home, a 3% surcharge would apply to purchasing a second property. If, on the other hand, we suppose that the children have never owned a property, they would not be subject to this additional surcharge.

Purchasing a property as parents and allowing your child to use it while attending university results in the property's value remaining in the parents estates for IHT purposes.This implies that the cash used to purchase the property is classified as a gift to your children, the value of which is excluded from your estate for IHT purposes if you survive seven years after the gift.

The property's value would be transferred to your childrens estate, together with any increase in value, rather than remaining in your estate.

Tenancy considerations

Obviously, making and living with new friends is a part of the university experience, but caution is required here as well. Renting a room to friends does not immediately result in the formation of a tenancy agreement, which means that renters will have extremely limited rights to remain in the property. It is beneficial to have a formal agreement specifying the rent to be paid, utility and council tax contributions, and the duration of the agreement.

However, if your child is not residing in the property, for example, while on a student placement or studying abroad, those tenants may immediately acquire a short hold tenancy, which includes certain rights and protections. It is important to seek advice here.

In many situations, it appears as though all of the taxes described above are beneficial when the property is purchased in the childs name. However, this comes with a cost: young adults lose control of important assets. Another option is to acquire jointly with your children or as trustees. All of the taxes listed above would have to be addressed under these scenarios.

Contact one of our experienced property advisors immediately. dns property law specialists are serving customers all across the UK. We can help you with all aspects of property acquisition, sale, and mortgage Property. For additional information or advice on buying or selling a property, tax-related, or any other property related matters, contact us immediately at03330886686or by email at enquiry@dnsaccountants.co.uk.

This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.