Thinking of buying a student flat for your child?

27 Jul 2018

white town house

The supplementary tax on second home ownership may well cast doubt in the minds of parents who are considering the benefits of purchasing accommodation for their children. The cost of sending children to university is painful for many parents. Even if the students take out a loan, there are fees, books, travel expenses, food, accommodation and pocket money to pay for. For many parents, these expenses have to be met out of their own after-tax income, which can be particularly costly if you are a higher or additional rate taxpayer.

Elaine McInroy, a partner and tax expert at Saffery Champness, comments:

“A major area that parents often assist in is finding somewhere for their children to live. Setting aside renting, there are a number of options, ranging from the parent owning the property to the child owning it, to a combination of ownership. Each option has its own pros and cons.”

Buying a property for your child

“A traditional route has been for parents to purchase accommodation for their son or daughter to live in and perhaps rent out spare rooms to assist with the mortgage and other costs. The advantages of parental control and asset protection are evident, however the disadvantages may outweigh these. Aside from the new 3% supplement to Stamp Duty or LBTT, they will not be able to take advantage of the ‘rent a room’ scheme, which is specifically for renting out spare rooms by owner-occupiers, meaning any rental income will be taxable on the parents at up to 45% or 46% for Scottish taxpayers. If funds need to be borrowed to assist with the purchase, the cost of borrowing is increasing as tax relief for the interest on residential property loans is now being restricted. This is being phased in between now and April 2020, when at most, basic rate tax relief only will be available. Finally, the capital gains tax Principal Private Residence (PPR) relief will not be available on disposal, subjecting capital growth to tax at up to 28%.”

Buying a property as a gift for your child

“However, if you are happy for your child to own the property themselves, this could be achieved by a loan, an outright gift (of cash or of the property), or a parental guarantee for the mortgage, with all rental income going to the son or daughter.

“The additional Stamp Duty or LBTT costs will not apply and any gain on the sale of the property will be exempt from capital gains tax, provided it has been your child’s main home throughout the period of ownership. A further advantage of assisted purchasing is that additional rooms can be let with gross rents of up to £7,500 being exempt from income tax under the ‘rent a room’ scheme. Any rent in excess of the exemption may fall within the child’s tax free personal allowance or at least at a lower rate.

“Purchasing through an outright gift of cash has the added benefit of removing the funds gifted from your own estate for inheritance tax purposes. Providing funding through a parental loan retains the capital gains and income tax benefits whilst allowing the parents to retain an element of control, possibly by securing the loan against the property or charging interest although the inheritance tax benefit is lost.”

Elaine McInroy suggests considering shared ownership with your child if a purchase in their name only is not possible. This will allow some but not all of the tax benefits to apply.

Finally, Elaine also suggests encouraging the child to save in a ‘Help to Buy ISA’ which will help them when they are ready to get onto the property ladder. She says:

“As long as they are over 16, they can earn up to 4% interest tax-free and then the state will add 25% tax free cash. Capped at £3,000, it could be thousands of pounds on top of what they save. Anyone can get one as long as they are a first-time buyer or plan to be in the future. Even if they’ve only an inkling they may buy a house at some stage, it’s worth starting it off. They can open one at any time from now until December 2019 and still get the bonus added as long as they use it for a deposit by 2030. As for what a first-time buyer is – the definition is strict. It’s someone who doesn’t own and has NEVER owned any interest in a residential property, either inside or outside the UK, whether it was bought or inherited.”

Professional advice should always be sought before implementing any of these strategies. If you have any questions, please get in touch with your usual Saffery Champness partner or contact an adviser here.

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Elaine McInroy

Partner, Edinburgh

Key experience
Elaine specialises in providing tax planning advice to private clients and their business interests.