As the start of the new academic year approaches, it’s time to look at some tax traps for unwary parents who invest in a property for a student child at university.
Buying and letting the property seems a good idea - but tax rules complicate the strategy, so here’s a look at some of the important points to consider:
● If parents buy a property and the main tenant is a relative, they may find many buy to let lenders will refuse a loan because of the legal issues involved in allowing a member of the family live in the property if the lender should have to repossess.
● Letting at less than a commercial rent to family makes the property an ‘uncommercial let’, which restricts the expenses that can be claimed to the value of the rent received.
The property is ‘tax neutral’ which means you can make no profit or loss on the property and any expenses cannot be included on a self-assessment tax return.
● If parents own the property and have never moved in to live there as their main home, any transfer of equity or sale will trigger a capital gains tax event.
So, buying and giving the house to a son or daughter would involve tax on any gain over the annual exempt amount (AEA) - but with price rises so marginal and the AEA index-linked at £10,100 for this tax year, rising to £10,600 next year.
● If parents transfer all or part ownership of a home worth £125,000 or more to a child, stamp duty will be due at the prevailing - which is 1% of the property value between £125,000 and £250,000.
If you or your son or daughter lets out a room in the property to another student, providing the rent is below £4,250 a year, they do not have to pay any income tax nor make a tax return.
