Fiscal Help for your Student Children
If you have children going away to university there are money saving options worth considering, if you are in a position to take advantage of them.
The cost of accommodation is a financial burden for any student. If you can provide funds to buy a home near the university, you could spend less on annual maintenance for your child and the investment could show a tax-free profit by the time they graduate.
The home can be purchased using a loan secured on your own home, or with capital provided directly by yourself or other relatives. In either case the property must be transferred to the adult student to allow him to take advantage of the capital gains tax exemption for his own home. This gift will not be subject to inheritance tax unless you die within seven years of the transfer.
However, the acquisition of a second property should not be undertaken lightly. Not only are transaction costs relatively high where the property is owned for a short period, but higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties, such as buy to let properties and second homes. The additional rate is be 3 per cent more than the ‘basic’ SDLT rate, and the tax regime for landlords has generally been becoming less favourable for some time. If buying a property for a student child, therefore, unless the property is conveyed directly to them, the additional rate of SDLT will be payable.
All tax rates below refer to 2019/20
Once in residence the student 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 £7,500 (from April 2016). If the rent does exceed this limit the student can ask HM Revenue and Customs to tax the excess only. This may be covered by the student’s own personal allowance of £11,000 Alternatively they can deduct valid expenses and report the net profit on their tax return.
Note, if it is considered that the property may also be offered for rent using AirBNB or a similar platform, a new rule from April 2019 has made properties ineligible for tax relief unless the owner lives in the property.
During the course the student does not pay any council tax on the property, even if there are several students sharing the house. One non-student lodger living with other students will receive the 25 per cent discount on the council tax for lone occupation.
Rather than supplying regular handouts to keep the student in books and beer during term time, consider investing capital in your child’s name at the beginning of the course. Such a gift will transfer income normally taxed at your marginal rate of income tax to your child and any capital gain arising will be benefit from their CGT exemption of £11,100. The potential disadvantages of gifting assets in this way are, however, obvious.