Buy a house for your student child?

Moneytalk
Leonie Kerswill
Tax partner, PricewaterhouseCoopers

Are you considering buying a house for your children to live in while at university?

Leonie Kerswill of PWC

One of the biggest expenses when a child leaves for university is the cost of accommodation, which can easily amount to thousands of pounds a year.

This, combined with rising tuition fees, is encouraging many parents to consider buying a property for their child to live in rather than, as many see it, wasting their money on rent.

Buying such a property not only provides somewhere safe for a child to live, but it can also provide rental income and a sound investment for the future.

Tax

Before rushing to the nearest estate agent, those considering buying a student house should consider the tax implications involved.

There are many factors that could affect the value of this type of property investment.

Among them are income tax liabilities, capital gains tax (CGT) and inheritance tax (IHT).

Then there are expenses such as stamp duty land tax, associated purchase costs, council tax, insurance, furniture and fixtures and fittings.

But with careful planning, the impact of these costs can be minimised.

Who is the owner?

The first and maybe most important decision to make is whose name the property should be bought in.

Some form of joint ownership allowing the parents to retain a degree of ongoing control might be a better solution

If the property is bought in the parents' name then even if it is the child's only residence there is no principal private residence relief and so CGT will be due on gains made when it is sold.

In addition the property will continue to be part of the parents' "estate" for IHT purposes.

An alternative would be to purchase the property in the child's name but with the parents' financial assistance.

This would mean that the property is not included in the parents' estate for IHT purposes and ongoing financial support provided by the parents while the child is at university.

For example mortgage repayments and other bills should be covered by the IHT reliefs and exemptions available.

If the property is bought in the child's name and it is their only or main residence there would be no CGT payable when the property is eventually sold.

Joint ownership?

Many parents however are reluctant to provide an 18-year-old with such financial independence.

For those who fall into this category, some form of joint ownership allowing the parents to retain a degree of ongoing control might be a better solution.

This needn't be 50:50, so the proportion of the value of the property which would remain liable to IHT and CGT in the parents' hands could be relatively small.

Alternatively a trust might be appropriate even with the recent changes to the tax regime.

Trusts are complex and specialist advice should be sought before opting for this.

Irrespective of who owns it, if the property is the child's main residence, then it is important to remember that they will be responsible for paying council tax.

Student deductions do, however, apply.

Taking in lodgers

To mitigate the costs of the property it is common to take in fellow students as lodgers.

The overriding factor is peace of mind for the parent knowing that their child has somewhere secure to live

If the property is owned by the parents they will be liable to tax on the rental income less relevant expenses.

However if the child owns and lives in the property and he or she rents out a room, or rooms, 'Rent a Room' relief, a form of income tax relief, is available.

Information on Rent a Room relief can be found on the HM Revenue & Customs (HMRC) web site (www.hmrc.gov.uk).

Under the scheme, if the total gross income from renting the rooms does not exceed £4,250 in a year then, subject to certain conditions, the income is exempt from income tax.

If the income from letting the room(s) exceeds the £4,250 limit then taxpayers can choose between paying tax on their profit from the letting, (which will be worked out in the normal way), or opt for the Rent a Room relief and only pay income tax on the amount above £4,250.

Assuming the child is not earning while at university, he or she can add their personal allowance of £5,035 (2006-2007 tax year) to the Rent a Room allowance to receive a total of £9,285 in rent before paying tax.

After the studies end

If the property is kept after a child leaves university to rent out, and they no longer live there, Rent a Room relief no longer applies.

In that case income tax will probably need to be paid on the amount of rental income received (after deducting certain expenses such as letting agents' fees, repairs and mortgage interest, etc).

Buying a property for a child to live in while at university should be considered in the same way as any other investment decision and many factors, other than tax, come into play.

Factors such as the ease of reselling or renting the property in the future, increased finance costs if the property is let after your child moves out, and the general "hassle" factor of owning a rental property in the student market need to be thought through before making the investment.

Very often though the overriding factor is peace of mind for the parent knowing that their child has somewhere secure to live.