Feathering new nests for fledglings
By Karen Fletcher, Senior Solicitor specialising in Residential Property
Exam results have been released and university terms have now started.It should be plain sailing from here on in for the child (other than the actual degree part of course) and parents should be celebrating the space, and peace, that comes from a newly acquired empty nest.
Unfortunately, celebrations are being put on hold whilst the headache of searching for accommodation, whether for first-timers or returning students, is completed.High rental costs, shortages and sometimes poor-quality student digs all contribute to the problem.
One option being looked at by an increasing numbers of parents who can afford it is buying property, either outright by releasing capital, or by using property or income as collateral to back up a mortgage.But this in itself is no picnic.It will involve making a series of decisions that will be dependent upon their own individual circumstances and life planning, and it is important all the options are weighed up and they work out what best suits them and their family.
One of the key decisions is who the buyer will be.This has an impact on asset protection, future tax implications, and the level of stamp duty.
The options include having the property:
- outright parental gift in the name of the child
- jointly purchases in name of parent and child
- held in trust for the child
- owned by the parent
- parent-backed purchase by the child
In each of these options, you will need to consider the following tax:
- Income tax – if any of the property is let out, rental income will be included in any income tax calculation, with some reliefs available for occupying landlords
- Stamp Duty Land Tax (SDLT) – where the purchase price is above a certain amount, SDLT is payable.This may be at different rates dependent on property ownership status.A first-time buyer may pay a lower rate but where a buyer already owns property, a higher rate is usually payable
- Capital Gains Tax (CGT) – where a property is not occupied as the primary residence of the owner, any gain made when selling is likely to be subject to CGT
- Inheritance tax (IHT) – payable on the value of assets owned at the time of death, with gifts made in the previous seven years included in any calculation.Where gifts are made into a trust and this exceeds the IHT nil rate band (above which IHT becomes payable) this may trigger an immediate and subsequent IHT liability
Where the property is bought in the name of the child they are likely to benefit from first time buyer’s relief on stamp duty, and may be able to claim rent-a-room relief against any rental income received.There may also be an IHT tax advantage for the parent, as provided they survive the gift by seven years it would take this out of the equation for inheritance tax purposes.Some lenders have a student-specific mortgage product which enables students to buy property in their own names and for parents to simply act as guarantor for the loan.
The downside however, is that the parent will have no legal control over what happens with the property.It may be vulnerable if any claim were made as a result of the child’s debt, or their relationships.
In a situation where the parent is the legal owner, although this may enable them to retain control of the asset, it may give rise to higher rates of stamp duty being charged if they already own other property.The property would remain part of their asset base for CGT and IHT purposes, forming part of their estate on death and 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 may be treated on a buy-to-let basis with associated rental income criteria needing to be met.
Buying through a trust could bring greater asset protection for the parent’s capital while also being set up in such a way as to enable the purchase to benefit from SDLT and income tax reliefs, although the pros and cons will vary, depending on how the trust has been set up.This can also determine what flexibility there is in enabling a subsequent sale of the property and return of funds when studies are complete.Trusts may be beneficial also in IHT planning, but while there may be a long term benefit this approach may give rise to immediate and subsequent IHT charges which would need to be taken into account.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.