If your child is about to head off to university for the first time, you’re probably rightly concerned about how much debt they (and possibly you) are likely to rack up over the next three or four years. With tuition fees now up to £9,000 per year and living expenses on top of that, the Institute for Fiscal Studies has estimated the average student debt at graduation is in the region of £45,000.
It’s therefore little wonder many parents have sought to reduce one of the other biggest costs for many students — accommodation — by investing in a property in the city where their child is going to be studying. According to accommodationforstudents.com, the average weekly rent for students last year was £82.09. And the costs are much higher for those in purpose-built accommodation — according to the NUS/Unipol Accommodation Costs Survey released in December last year, the average weekly rent for this type of housing now stands at a whopping £146.73.
You, or your child, could be facing costs up up to £10K a year, and that’s before admin and deposit fees are taken into account. Another big worry for many parents is that students are often asked to sign joint tenancy agreements, for which they must provide a guarantor. You could find yourself being a guarantor on a joint contract where you don’t even know the other students — and forking out if they don’t pay their rent.
It’s no wonder some parents decide instead of spending £20K in rent over the course of their child’s degree, they’ll instead shell out perhaps a bit more for a deposit with a view to recouping the money down the track.
Ownership key to tax position
Traditionally, many parents bought a house for their child to live in, but retained ownership of the property. From a tax perspective, this might not be the most effective solution to housing your child given recent budget announcements, which have included the introduction of a 3% stamp duty surcharge for second homes and the reduction of mortgage interest relief for individual buy to let investors from next year.
When you decide to sell, you could also face a capital gains tax liability, and if you don’t charge your child the full market rent, HMRC may not allow you to claim relief for expenses in full. It can also be tricky to find a mortgage lender willing to allow your own child to reside in the property.
If, on the other hand, you purchase the property in your child’s name, you’ll avoid the stamp duty, and any increase in the value of the property will probably be tax-free due to private residence relief and/or letting relief, depending on how many people live in the property with your child.
Another huge bonus, depending on the size and rental income of the property, is the recent increase in the rent-a-room allowance to £7,500. If your child (whether they own the property or not) is collecting rent of less than this per year, it is tax-free. However, if they claim the rent-a-room scheme they cannot claim any tax deductions (expenses) for running the property, so some people may be better off reporting the income as normal rental income.
Some parents may well be reading this thinking, ‘but it needs to be in my name because I’m not prepared to give my son/daughter a deposit’. Even if this is true, there are some options that will allow you to help them without gifting them a large sum of cash — Bath Building Society has a Buy for Uni product that allows for up to 100% lending, although it will want to use your property as security and you may need to be a guarantor. Monmouth Building Society will consider a similar arrangement. To secure any type of lending aimed at housing your student child, it’s a good idea to consult a broker to get a full range of your options.
Is it a good investment?
Regardless of who will own the property, you need to do the sums and decide whether or not it’s a good investment and this will depend largely on where your child has chosen to study. A recent study by Urban.co.uk found that cities in the north provided the best student rental yields, while a study by eMoov last year had similar findings.
Wherever you’re looking, it’s worth bearing in mind that buying the stereotypical large student house has become a lot more complicated in recent years, with HMO rules now in force, as well as Article 4 directions requiring planning permission to let properties on a shared basis now in place in many areas. Check the situation with the council where you’re looking at an early stage — a two-bedroom flat might be less hassle if the area is anti-HMO. Be wary of studio flats or any packaged student accommodation marketed to investors – it’s almost impossible to get mortgages on these and both rental and resale values are limited due to restrictions on who is allowed to live in them.
Planning issues aside, the traditional student house is facing increased competition from purpose-built blocks, with overseas students in particular favouring this type of accommodation. Students generally expect much more than they did in the past; very few are willing to accept Young Ones-style digs these days.
Due diligence on the university itself is also a vital part of the process. How popular is it with domestic and foreign students? How well ranked is it and is its position improving or deteriorating? You’ll probably have undergone a similar process with your child when choosing their course, but in any case the Times Higher Education and The Complete University Guide are good places to get more detailed information about the university’s prospects.
If your child has picked the right city, you could find their university education provides a first-class investment opportunity for yourself. Even if the investment case looks a bit closer to a third than a first, you may still help them escape their university years with half the debt of their peers, which could end up being just as valuable to them as their degree.
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.