Article by: Jenny Marks Muras Baker Jones Accountants 01902 393000
Background
Over recent years the idea of parents buying a property in a university town and letting their children live there for three years before then selling the property has become more common.
For those considering such an option there are a number of points worth considering which could offer the opportunity for tax savings.
Detail
As an alternative to buying a property, parents may consider making a loan to the child going to university. The child, rather than their parents, could then use the loan to buy their first home and rent out the rooms in their own name to their friends or other young people.
This option presents two obvious possibilities.
Firstly, the child would be in receipt of the rental income rather than their parents. If the parents are in a position to buy the house then it is likely that they would be higher rate taxpayers. Conversely the child may have no other income and could potentially receive up to £20,000 of rental income p.a. which would not be taxable. Provided the child is living in the property themselves then £7,500 of the rental income would be covered by rent-a-room relief and the remainder of the £20,000 would be covered by their personal allowance.
The potential income tax saving this presents is in itself a sensible reason to consider such an option.
Secondly, following the increase in the Stamp Duty Land Tax (SDLT) relief offered to first time buyers by Kwasi Kwarteng in his Mini-Budget, there is the potential for an SDLT saving that should also be considered. As long as the individual purchasing the property is a first time buyer, then they would qualify for that relief. This is likely to be the case if the child is the purchaser. First-time buyers will pay no SDLT up to £425,000 and can claim relief on properties valued up to £625,000.
Care does need to be taken however in order to qualify for the first time buyer status. All those named as the purchasers must be first time buyers. If mum and dad’s name were to appear on the purchase or land registry documents then the property would not qualify for the first time buyers SDLT relief.
There is also the point to remember that an individual can only have one “first time purchase”. A second purchase after graduation would therefore not qualify.
If you have any questions regarding the points raised above or would like any assistance in determining if such an option would offer you tax savings, please speak to our Tax Director, Jenny Marks.
