Feathering new nests for fledglings: Should you buy a property for your student offspring?

Exam results are out, and students all over St Albans now know which university they’ll be heading off to – and after the relief and celebrations comes the headache of searching for suitable accommodation.

Faced with high rental costs, housing shortages and poor-quality student digs, more and more parents are considering buying property for those children flying the nest.

Nigel Drake, Partner at Debenhams Ottaway, says: “For parents who can afford it, it can seem an attractive idea to buy a property for your child – whether outright, or by using property or income as collateral to back up a mortgage. But whether you should depend upon your own individual circumstances and life planning, so you must make the decision carefully.” 

Nigel added: “A key question is who the buyer will be, as this will have a big impact on asset protection, future tax bills and stamp duty costs. You should also consider who is actually going to occupy the property – is it going to be just your child, or will other students live there too? Some flats may have conditions in the lease limiting its use to one family or household, and some areas have planning constraints regarding Houses in Multiple Occupation.”

What are the options when it comes to buying a property for your child?

There are many different purchase options, including the property being:

• gifted outright by the parent in the name of the child
• jointly purchased in the name of the parent and child
• owned by the parent, but held in trust for the child
• owned by the parent outright
• purchased by the child with parental backing

What taxes must you consider if you’re thinking of buying a property for your child?

• Income tax: If any of the property is let out, rental income will be included in any income tax calculation. Some reliefs are available for occupying landlords.
• Stamp Duty Land Tax (SDLT): This is payable where the purchase price is above a certain amount. The rate may vary dependent on who owns the property. A first-time buyer may pay a lower rate, but if the buyer already owns property a higher rate is usually payable.
• Capital Gains Tax (CGT): If a property isn’t the owner’s primary residence, any gain made when selling is likely to be subject to CGT.
• Inheritance tax (IHT): This is payable on the value of assets owned at the time of death, with gifts made in the previous 7 years included in any calculation. Where gifts are made into a trust and this exceeds the IHT nil rate band above which IHT becomes payable, there may be an immediate and subsequent IHT liability.

What are the pros and cons of the child being the legal owner of the property?

If the child is the legal owner, they’re likely to benefit from stamp duty relief for first time buyers. Any income tax on rental income would be their liability, but as an occupier they can claim rent-a-room relief.

If the property was gifted to the child, there may be an IHT tax advantage for the parent. This is because the property will be taken out of the inheritance tax equation as long as the parent survives the gift for 7 years.

The downside for parents is having no legal control over what happens with the property, and the asset may be vulnerable if a claim were made because of the child’s debt or relationships. Some lenders offer a student-specific mortgage product which allows students to buy property in their own names, with parents simply acting as guarantors for the loan.

What are the pros and cons of the parent being the legal owner of the property?

Where the parent is the legal owner, this means they can retain control of the asset. But if they already own property, they may have to pay higher stamp duty rates.

The property would stay part of the parent’s asset base for CGT and IHT purposes, forming part of their estate on death and with no principal private residence relief (PPRR) for CGT on any subsequent sale.

Any rent received would form part of the parent’s taxable income and there’d be no occupier rent-a-room relief. 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 offer greater asset protection for the parent’s capital. How it’s set up will determine if the purchase can benefit from SDLT and income tax reliefs, and whether there’s flexibility to sell the property and return the funds when the child’s studies are complete.

Trusts may be beneficial in IHT planning too, but while there may be a long term benefit this approach may give rise to immediate and subsequent IHT charges.