For many parents, when their children fly the nest and leave for University, it is a significant event. One of the practical concerns is often the availability, quality and cost of student accommodation, particularly when they leave halls. However, this can be an ideal opportunity for some tax efficient financial planning by parents whilst at the same time providing a home for their children whilst they are at University.
Clearly the practical implications need to be carefully considered but where parents are able to gift their child the cash to buy a property or to put down a deposit and act as guarantor on a mortgage, significant tax savings are possible. If the property is partly owned by the parents the tax advantages are diluted.
The key tax advantages which are in point when a child is able to buy a property in their own name are summarised below.
A gift of cash to a child to acquire their own home will be free from inheritance tax as long as the person making the gift survives for more than seven years. This therefore represents an attractive way of passing on wealth potentially tax free.
Depending upon certain conditions being met, it may be possible for the child to receive up to £19,000 tax free income each year. If the child owns the property in their sole name, lives in it and lets out rooms to other students, they should be eligible to claim ‘Rent a Room Relief’ of up to £7,500 plus they will also be entitled to the £11,500 personal allowance. This could give the child a significant income to cover mortgage repayments (where parents have gifted cash for a deposit, for example) and contribute towards their living expenses whilst at University.
'Rent a Room Relief' is designed to enable individuals to benefit from an income tax exemption where they let a furnished room or rooms in their only or main home; it requires the actual physical residence of the taxpayer and the tenant must use the area as living accommodation not just as a place of study.
Capital Gains Tax
When the property is sold, if it has increased in value and the child has lived in it as their main residence, all or part of the gain could be tax free by virtue of the principal private residence (‘PPR’) exemption. The amount of PPR available can be impacted by renting rooms to tenants however, the tax position should still compare favourably to the normal CGT rate on residential properties which is 20% for basic rate taxpayers or 28% for higher rate.
Stamp Duty Land Tax
SDLT will be payable as normal but assuming this is the only property owned by the child, the 3% surcharge will not apply.
Clearly the tax advantages cannot be considered in isolation; giving significant funds to adult children has a number of practical implications but for some families, in the right circumstances, it can be a very attractive proposition.
If you would like to discuss tax efficient ways of investing in property please contact me for further advice.