Tax-free property investment

When your young ones finish school and go off to college or university not only might you have to find money to meet their tuition fees, but you'll also have to pay for somewhere for them to live. A property investment may be the answer.

Cheaper to buy than rent

Rent. The cost of accommodation is probably the biggest financial burden on any student/parent. Unless they are in halls of residence, some landlords expect the student to pay a full twelve months' rent, not just for term time. There are also deposits to find.

For example, for three students sharing a terraced house, we've been quoted £250 a month each - plus utilities. This means at least £3,000 to find plus a deposit.

Buy. If you can afford to buy a home for your student to live in, the annual maintenance you pay to support him or her can be reduced.

For example, they pay no rent but the other two students would pay a total of £6,000 (£3,000 x 2) in rent to you as landlord. Dividing the rent by an interest rate gives you the (interest-only) mortgage you can afford. If the interest rate is 6% then you could fund a £100,000 (£6,000 / 0.06) mortgage. Worth considering, particularly if you could also make a capital gain on the property on sale.

Tax trap 1. Rental income (less expenses) is, unfortunately, taxable. Remember that you can't use the tax-free Rent-a-Room scheme because the property is not your principal private residence (PPR).

Tax trap 2. Any capital gain you make on the property is taxable at a maximum of 28%. For example, on a £30,000 gain you'd pay up to £8,400 in Capital Gains Tax (CGT). However, there is a solution to this potential CGT problem.

Gains of a student landlord

Tip 1. The property can be purchased using a loan secured on your own home, or with capital provided directly by yourself or other relatives. In either case legally transfer the property into the name of the adult student. This way the property will be treated as their PPR and so will be free of CGT when sold.

Tip 2. The capital you provide can be treated as a loan to be repaid when the property is sold. The loan agreement between you and the student can be drawn up quite simply in the form of a letter. You may want the capital to gather interest at a set rate. The agreement can allow any annual interest due to be rolled-up with the capital and be paid over when the capital is returned.

Tip 3. To ensure your dearest child does not sell the property and pocket the proceeds behind your back, ask your solicitor to place a legal charge on the property at the Land Registry.

Be careful. There should be no documentation providing for any gain on the property to be returned to the parent.

Rent-a-Room relief

Tax-free. Once the student is in residence, they can generate some tax-free income by letting rooms to friends, as long as the total rent in any tax year is no more than the Rent-a-Room limit of £7,475. If the rent exceeds this limit, the student can ask the Taxman to just tax the excess, which may be covered by his tax-free personal allowance of £4,615. Meaning they have income for books and beer during term time. Less for you to fund.

Be careful. You might be tempted to get the child to hand over the rent rather than invest it in books and beer. Don't: this can cause tax complications.

Buy a house and let them live in it. When it comes to selling, any profit made will be tax-free if the property is in the name of the student. Lend them the money to buy the house but roll up any interest until it's sold.

If you would like any more information or advice about property investment or tax, please get in touch on 0191 386 4786 and we'll be glad to help!

Tax-free property investment

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