September, predominantly known as the start of the new academic year, with most universities welcoming both first time and returning students, is often the most challenging time for parents to find affordable and high-quality university accommodation. Lenders are now looking at students for early mortgages, turning them into landlords and student homeowners with the help of their immediate families. A student can buy a house and rent the spare rooms in the house to friends or fellow students with the rental income covering the mortgage payments. In return allowing young people to avoid expensive and often poor-quality accommodation by enjoying the security of owning their home and making a profit while studying.
To obtain a ‘buy-for-uni’ mortgage, the student’s immediate family members must provide security in the form of either cash or equity in a property. The lender will be protected in the event there is an outstanding debt over the property as a result of the property being repossessed or sold for less, any shortfall will be recovered from the immediate family member. The mortgage term converts into a traditional mortgage without parental security after the student graduates.
Range of alternative ownership options:
- An outright parental gift in the name of the child – this may have Inheritance Tax (IHT) implications depending on whether this gift exceeds the nil rate band.
- Jointly purchased in the name of the parent and child – this may give rise to higher Stamp Duty Land Tax (SDLT) especially where the parent already owns a property.
- Held in trust for the child – this could bring greater asset protection for the parent’s capital while also being set up in such a way as to enable the purchaser to benefit from SDLT and income tax reliefs. This method is flexible in allowing the parent to sell the property and return the funds when the child has completed their studies. A trust also has IHT benefits; however, it may give rise to immediate and subsequent IHT charges.
- Owned by the parent – if the parent, as the legal owner, already owns property, it may give rise to higher rates of Stamp Duty Land Tax (SDLT) 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. This option would have Capital Gains Tax (CGT) and IHT consequences, the property would remain part of the parent’s asset and would form part of their estate on death with no principal private residence relief (PPRR) for CGT on any subsequent sale. Any rent received by the parent would form part of their taxable income, and there would be no occupier rent-a-room relief. If a mortgage were needed, the property might be treated on a buy-to-let basis with associated rental income criteria needing to be met.
- Parent-backed purchase by the child – as a legal owner, the child is likely to benefit from first-time buyers relief on Stamp Duty Land Tax (SDLT), allowing them to pay a lower rate or nothing at all where the purchase price is above a certain amount. Any Income tax on rental income would be their liability.
It is essential to weigh up the options carefully and to seek tax advice for any future tax implications.
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