Tax efficient student property

The issue

There is an incentive for parents to ‘put’ income into their children’s hands in order to access lower tax bands. For example, it seems like a good idea to give children shares in a family company and arrange matters so that they receive tax-free dividends of £14,570 (based on a £12,570 personal allowance and £2,000 dividend allowance). This strategy often will not work because (broadly) income received by a minor, from an asset received from a parent, is still taxable in the hands of the parent. All this changes when the child reaches the age of 18. At this age it should be fairly easy for a child to use lower rate tax bands. This strategy can make particular sense when children head off to university. As students, they often will not make a significant income and will need to be funded by the ‘Bank of Mum and Dad’. It makes much more sense if this funding can be structured as (low) taxed income in the student’s hands, rather than as a gift of post-tax income from the parent. This Tax Bite considers how this principle can be applied to student accommodation.

Rent a Room relief

This broadly works by allowing the occupier of a house to rent a room to a lodger for £7,500 a year without having to declare any income. Along with the personal allowance of £12,570 this would provide scope for annual rent of £20,070 to be received tax-free.

Acquiring the property

Typically, the parent and child would buy the property as ‘tenants in common’. Although the parent can own most of the property (95% say) it is possible for them to agree that the child receives and is assessable on all of the income. It is often better to do things in this way rather than sharing the income because the rent a room allowance reduces to £3,750 when income is shared. The child would then typically live in the property and rent it to fellow students. In this way, a parent’s capital funds can be used to allow income to accrue to a child at lower tax rates. Coincidentally, around £20,000 is not far off what an average student needs to live off and pay university tuition costs.

Forbes Dawson view

Often these tax advantages will be a decisive factor in a parent’s decision to buy student property. Parents with family companies may prefer to simply gift shares and route dividend income into their children’s hands. Clearly, if the property route is pursued then other factors, such as stamp duty land tax and capital gains tax (on ultimate sale), need to be considered.  It can sometimes be possible to use trusts to ensure that no capital gains tax is payable on a sale (by using the child’s Principal Private Residence Relief) although unfortunately without Rent a Room relief. That is another subject……

 

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