The new supplementary tax on second home ownership will no doubt cast more doubt in the minds of those who may be considering the benefits of purchasing accommodation for their children. For many parents, the cost of sending children to university is painful. Even if the students take out a loan, there are fees, books, travel expenses, toiletries, food, accommodation and pocket money to pay for. For many parents these expenses have to be met out of their own after-tax income, which can be particularly costly if you are a higher tax payer.
Roger Wareham, a partner at leading accountancy firm Saffery Champness, looks at how this could be done to make it more tax effective. He says:
“A major area that parents often assist in is finding somewhere for their children to live. Setting aside renting, there are a number of options, ranging from the parent owning the property to the child owning it, to a combination of ownership, each of which has its own pros and cons.
“A traditional route has been for parents to purchase accommodation for their son or daughter to live in and perhaps rent out spare rooms to assist with the mortgage and other costs. The advantages of parental control and asset protection are evident, however the disadvantages may outweigh. Aside from the new 3% supplement to Stamp duty or LBTT, any rental income will be taxable on the parents at up to 45%, the capital gains private residence relief will not be available on disposal, subjecting capital growth to tax up to 28%, and they will not be able to take advantage of the ‘rent a room’ scheme which is specifically for renting out spare rooms by owner-occupiers.
“However, If you are happy to have shared ownership with your child or for them to own the property themselves, this could be achieved by a loan, an outright gift (of cash or a percentage of the property), or a parental guarantee for the mortgage, with all rental income going to the son or daughter. Any gain on the sale of the property will be exempt from capital gains tax, provided it has been your child’s main home throughout the period of ownership. A further advantage of assisted purchasing is that additional rooms can be let with gross rents of up to £4,250 being exempt from income tax under the ‘rent a room’ scheme. Any rent in excess of the exemption may fall within the child’s tax free personal allowance or at least at a lower rate. Purchasing through an outright gift of cash has the added benefit of removing the funds gifted from your own estate for inheritance tax purposes. Providing funding through a parental loan retains the capital gains and income tax benefits whilst allowing the parents to retain an element of control, possibly by securing the loan against the property or charging interest.”
Roger Wareham also suggests encouraging the child to save in a ‘Help to buy ISA’ which will help them when they are ready to get onto the property ladder. He says:
“As long as they are over 16, they can earn up to 4% interest tax-free and then the state will add 25% free cash, and it could be £1000s on top of what they save. Anyone can get one as long as they are a first-time buyer or plan to be in the future. Even if they’ve only an inkling they may buy a house at some stage, it’s worth starting it off. They can open one anytime from now until December 2019 and still get the bonus added as long as they use it for a deposit until 2030. As for what a first-time buyer is – the definition is strict. It’s someone who doesn’t own and has NEVER owned an interest in a residential property, either inside or outside the UK, whether it was bought or inherited.”
Professional advice should always be sought before implementing any of these strategies.
Saffery Champness is a pre-eminent adviser to private clients and their business interests, providing market-leading accountancy, tax, audit, business advisory, trust and fiduciary services. The firm also specialises in advising charities and not-for-profit entities, entrepreneurs, international individuals and businesses, professional and consultancy businesses, as well as those in the sports and creative industries.
Founded in 1855 by Joseph John Saffery, the firm is over 160 years old and is currently the 12th largest accountancy firm by UK fee income.
For further information, please visit www.saffery.com.