Taking into consideration that 40 per cent of first-time buyers get financial support from their parents when trying to get a foot on the property ladder after University, chances are that you will be helping them out with property in one way, shape or form during their life. One possible option to make sure that they remain safe and secure when they fly the nest is to invest in a buy-to-let property for them during their studies.
This option will appease your anxious mind, allow you to avoid shelling out thousands of pounds on rent for dilapidated student houses which youve never seen, and at the same time make a bit of money. Recent research has gone to show that parents who buy a property for their child and let the spare rooms out to other students, can make a profit of almost £20,000 over the three years their child spends at University.
Tax really can be taxing
One of the first things that should spring to mind when considering a long-term investment like this are the tax implications on the property. These depend on whether you are signing the mortgage in your own name, giving sole ownership over to your child or meeting in the middle, but bear in mind that there are also other associated taxes, the main one concerning money generated from rent.
If you sign for the property in your name it will be liable for both Inheritance Tax (IHT) as it becomes part of your estate, and Capital Gains Tax (CGT) when you come to sell it. If you place the property in your childs name then you are giving them legal ownership, your role will simply be providing the financial support. This method bypasses the costly CGT and IHT, and the child living there only has to pay their share of the council tax on the property, although if all residents can prove that they are students, they do not have to pay any.
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As far as renting out the other room(s) goes, if the child is named on the deeds and is living in the property then they are entitled to claim Rent a Room relief. This means that as long as the gross annual income is less than £4,250, they are exempt from tax on it. If tax does have to be paid, the tax relief means that only the portion of income above this figure is liable to be taxed and not the total amount. However, if you are the named owner you will be taxed on all the income the property generates.
Most parents are reluctant to make their carefree 18 year-old the legal owner of the property, especially as in most cases they are living away from home for the first time, so the happy medium in this situation is to enter into a joint ownership. The balance of this does not have to be 50:50 though, so it is very possible to minimise any nasty IHT or CGT payments that will apply by giving them the larger portion.
You will still however be required to deal with any other legal implications this kind of investment may have, such as the House of Multiple Occupancy (HMO) licensing laws. A house of multiple occupancy is one inhabited by ‘persons who do not form a single household’; i.e. not a recognised family unit. The number of people needed for this definition varies from one local authority to another, and as the landlord you need to apply for the necessary license from the council in order to begin renting it out.
That extra bit of security
Not only will your child be safe and secure whilst they are undertaking their studies, as landlord you will also be able to control the type of accommodation they are living in, their choice of flatmates and the level of rent. Another bonus is that your son or daughter will actually be living in the house so they will come into contact with any disputes first, before they are taken up with you. This is a good situation to be in as they can act as a mediator amongst their friends, and find a calm, rational solution to any problems that have arisen.
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If your child is taking a gap year before starting at their chosen University, then you may even want to make an investment in the citys student hotbed in the 12 months preceding their degree course. Its a good way to test the water and see if it is indeed a sustainable investment, or even just spend that year doing up a 3 or 4 bed less-than-suitable property to make it into a 5 or 6 bed goldmine.
If you are buying a property in a student area it pays to remember that as a general rule, the larger the property is, the more in demand it will probably be and you are likely to be inundated with potential tenants. This said, the house has to be in a good condition otherwise you will be putting sharers off and, although there are always less larger houses in proportion to the number of students looking for one, there are still other options around.
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Current property hotspots outside of the Greater London area which may interest budding University town investors are: Bournemouth, Brighton & Hove, Exeter, Middlesborough, Newport, Nottingham, Peterborough, Preston, Sheffield, Southampton, Stoke, Sunderland, Swindon, and Walsall. North of the borders in Scotland – Aberdeen, Dundee and Glasgow are safe bets for buying property, and if you are thinking about investing across the waters in Northern Ireland, its a good idea to buy in Belfast.
Buying a property for your child whilst they are studying is definitely not a decision which should be taken lightly, you need to weigh up all the pros and cons. If your child is only just starting their degree, you have to decide between you whether they want to go into halls for the first year and then re-assess this measure in a years time, so that they can get the most out of their first year in halls.
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If they are well into their degree and have an established group of friends who will act as ready-made tenants, this could work in your favour and theirs by reducing the chances of friction within the house (a problem which could arise when strangers are brought in. In this particular scenario you also need to consider what you will do once they finish their degree, as you may not be looking to sell up after only a year or two.
Nigel Terrington, chief executive of the Paragon Group of Companies, comments on such an investment: With landlords benefiting from both rental income and the uplift in the capital value of their properties, total returns are very attractive, despite house price increases. There are not many forms of investment that combine long term stability with that level of return.
Ultimately, renting to students is a tricky business. Most will have come straight from school and this will be their first real experience of living away from home. A lot of the time there is little drive to keep the place clean and tidy, and in extreme cases the tenants have a complete and utter lack of respect for the house. In the worst cases, it can be a source of more hassle than you are prepared to deal with, but on the other hand, your childs safety and security is paramount and recent research shows that University dwellings are currently reaping above average returns making it a sound investment in both your childs future, and your own.
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