Buying a property for a child at uni

21 Nov 2014

Buying a flat or house for a son or daughter to live in while at university is seen by many parents as a sound investment and will at least ensure that their child has an acceptable standard of accommodation while studying.  If the novelty of communal living is wearing thin for your own first year student, you may be considering buying a house or flat for your son or daughter and a couple of fellow students to live in.

Buying in your own name

The safest way to keep control over your investment would be for you to own the house or flat, with the occupation of your child and his or her friends regularised by letting the property on an assured shorthold tenancy.  An assured shorthold is a tenancy for a period of at least six months with no security for the tenants once the tenancy period has expired. The academic year of approximately nine months' duration is well suited to the assured shorthold regime. The landlord has an absolute right to request tenants to leave the property at the end of the tenancy period on giving the tenants two months’ written notice. If any tenant does not vacate on the expiry of the notice, the landlord can use an accelerated possession procedure, which is straightforward and inexpensive, under which the court can order the tenant to leave the property without the need for a court hearing.

It is essential to have legal advice before entering into an assured shorthold tenancy agreement and in relation to requirements on holding a deposit. Some websites offer standard tenancy agreements, but this would be a false economy if you find yourself with an unsaleable property due to the presence of a tenant you are not entitled to remove.

If you are contemplating buying a flat rather than a house for this purpose, it is important to check that the lease of the flat allows short term letting and sharing occupation of the property without too many restrictions or formalities.

Tax consequences

Inheritance Tax (IHT)

The asset will remain within your estate and be liable to IHT on your death, regardless of whether or not you are domiciled in the UK.

Capital Gains Tax (CGT)

Any gain on a later sale by you will be liable to CGT if greater than your annual allowance (currently £11,000). In the past, if you were not UK resident you would not be subject to CGT, but from April 2015 this will change in respect of UK residential property. There is no main residence exemption, as you are not occupying it as your main residence.

Income Tax (IT)

Will be payable on any rent, less deductions for certain expenses (e.g. Council Tax, mortgage interest payments, etc).

Stamp Duty Land Tax (SDLT)

Will be payable on the purchase price if greater than £125,000, on a sliding scale rising from 1% up to £250,000 to 7% on over £2,000,000.

Buying in your child’s name

An alternative would be for your child to own the property, albeit purchased with your gift of cash and possibly your guarantee of their mortgage. In these circumstances a formal tenancy may not be as essential to avoid security of tenure for fellow students, whilst your child is living there with them (but an assured shorthold tenancy will give greater certainty).  Also, if the property is bought with the assistance of a mortgage, the lender is likely to have specific requirements in relation to letting and sharing the property.

Tax consequences

Inheritance Tax (IHT)

The cash gift will be a potentially exempt transfer and thus free of IHT if you survive 7 years from the gift. If you are non-UK domiciled and the gift is completed outside the UK, it will be outside the scope of IHT. The property will then be in your child’s estate.                                 

Capital Gains Tax (CGT)

If the property is your child’s main residence then a sale should qualify for main residence exemption and no CGT will be due. Complete exemption may be restricted if a number of rooms have been let. However, there is a further generous relief for let property which, together with the annual exemption, could avoid any liability to CGT.

Income Tax (IT)

The rental income will belong to your child and will be taxable if greater than his/her personal allowance (£10,000). However, he/she may also take advantage of the rent-a-room allowance (up to £4,250) applied to gross rent (instead of being taxed on net rent after expenses). Thus up to £14,250 could be earned in rent before tax was due. (NB: different rules apply if your child is under 18).

Stamp Duty Land Tax (SDLT)

 As above.

More complex structures

In the past, more complex property holding structures involving offshore trusts and companies were commonly established by non-UK domiciled individuals.  However, since the introduction of the annual tax on enveloped dwellings (ATED) and the prospective introduction of a CGT charge on non-UK residents selling UK residential property, this has become less attractive.

Additional information