When a child packs their bags and heads off to University, it is always going to be a big day for parents. However, some see this as an opportunity to simultaneously help their child(ren) and do some financial planning by investing in a home for them whilst at University. Potential a long term investment even after they’ve left.
However, this gives rise to a number of questions and the tax and practical implications need to be considered and balanced. For example, how should the purchase and ownership of the property be structured? Should it be owned by the parents or by the parents and the child? Should it be money gifted to the child to buy the property?
Key considerations before buying a student house
Specific advice should always be obtained, taking into account the following tax considerations:
Stamp duty – possible 3% additional cost
Stamp duty will be payable on the property irrespective of the ownership. If the parents acquire the property on their own or part ownership with the child then on the basis that they already own a property, a stamp duty surcharge will apply adding an additional cost of 3% on ALL of the purchase price.
Income tax – possible tax free income for child
If the property is owned completely by the child who lives in the property and a room(s) are rented out to another student(s) then, if certain conditions are met, it may be possible for the child to receive £19,000 of tax free income. £7,500 of income under the ‘Rent a Room Relief’ scheme and £11,500 falling with their tax free personal allowance (for 2016/17).
Rent a room relief is only available if you own and live in the property. If the property is jointly owned, rent a room relief would NOT be available. The income would be taxable on all parties and although the child may be able to receive £11,500 tax free, the parent would be subject to tax on their share, possibly at 45%.
Capital gains on disposal – possibly tax free compared to 20%/28% tax
Hopefully when the property is sold this will be at a gain value as Capital Gains Tax (CGT) would be payable. However, if the property is owned by the child and they have lived in this as their main residence all or part of the gain could be tax free under the principal private residence exemption. This compares to the normal CGT rate on residential properties of 20% (basic rate taxpayers) or 28% if higher rate.
Inheritance tax advantage
A gift of cash to a child to enable them to acquire the home or have a deposit for the home will be exempt from Inheritance Tax (IHT) if the person gifting the cash does not die within seven years of the gift. This can therefore be a good way to pass wealth without incurring IHT.
An outright gift to a child has many tax advantages over ownership/part ownership directly:
- Income tax – tax free income
- Stamp duty – no surcharge
- Capital gains – all or part tax free on disposal
- Inheritance tax – likely to be passed tax free
However, tax cannot be the deciding factor and the disadvantages are more practical in that gifting funds to young adult has risks and individual circumstances must be taken into account. Parents cannot get their money back!