Autumn is upon us, and those of us with adult children may be preparing them for life as new students, heading for university. In our region, with Durham and Teesside universities just on our doorstep, we’re no stranger to new student neighbours moving in in preparation for their courses starting.
However, following the purchase of new bedding, toasters and teaspoons, the next big headache for parents is often the search for accommodation, to ensure their child has a roof over their head as they embark on their next adventure, away from the safety of the halls of residence.
Faced with high rental costs, shortages and sometimes poor-quality student digs in many cities, increasing numbers of parents are investigating the option of buying property instead of renting, but the different options can make it a minefield.
For parents who can afford it, one attractive option is to buy a property for the student, whether outright by releasing capital, or by using property or income as collateral to back up a mortgage. But a property purchase for the child involves a series of decisions that will be dependent upon individual circumstances and life planning, so it’s important to weigh up the options carefully.
A key decision to make is ‘who will be the buyer?’ as this will have a big impact on asset protection, future tax implications and the cost of purchase when it comes to stamp duty.
Ownership options include:
There are a number of taxes that need to be considered, both in the short term and as part of estate planning.
Where the child is the legal owner, they are likely to benefit from first time buyer’s relief on stamp duty and may be able to claim rent-a-room relief against any rental income. Any income tax on rental income would be their liability.
I spoke to my colleague Elizabeth Armstrong, a Director and Solicitor in the Private Client Department at Latimer Hinks, who said: “There may be an inheritance tax (IHT) advantage for the parent if the child is to be the legal owner, as long as the parent survives for seven years after the gift is made. The downside for a parent is having no legal control over what happens with the property, which may be vulnerable if any claim were made as a result of the child’s debt or relationships.”
Some lenders have a student-specific mortgage product which enables students to buy property in their own names and for parents to simply act as guarantor for the loan.
Where the parent is the legal owner, this may enable them to retain control of the asset, but if they already own property, it may give rise to higher rates of stamp duty as an additional charge is made on second and further property purchases.
Elizabeth added: “Any rent received by the parent would form part of their taxable income and there would be no occupier rent-a-room relief available. If a mortgage were needed, the property may be treated on a buy-to-let basis with associated rental income criteria needing to be met.
“Buying through a trust could bring greater asset protection for the parent’s capital while also being set up in such a way as to enable the purchase to benefit from Stamp Duty Land Tax and income tax reliefs, although the pros and cons will vary, depending on how the trust has been set up. This can also determine what flexibility there is in enabling a subsequent sale of the property and return of funds when studies are complete.”
If you’re considering purchasing a property for a student and are unsure of the legal implications, you should make an appointment with your solicitor to discuss the options.
Please note: This article is intended as guidance only. No responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by Latimer Hinks. In addition, no responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by the firm.