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Leaving the Nest – Tax Planning for Student Costs

Leaving the Nest – Tax Planning for Student Costs

It can be an expensive business when your kids go to university, and those parents who can afford to will often try to help them out, either by paying them so much a month, or by buying them a place to live. This article looks at some of the more tax efficient ways to do this.

 

Everything in this article assumes that the child in question is over 18 – below that age, they are a “minor” for tax purposes, and the situation is more complicated. Although these strategies are commonly used in the context of university, they could also be useful in any situation where you want to help set your children up for their adult life.

 

Essentially, these ideas revolve around two tax reliefs:

 

  • The exemption from CGT on the disposal of a person’s “main residence”
  • “Rent-a-Room” Relief

 

Main Residence Exemption

It is common knowledge that the sale of your “Main Residence” is exempt from CGT. This exemption also extends to a property owned by a Trust, where a person has occupied the property as their main residence “under the terms of the settlement”.

 

Rent-a Room Relief

“Rent-a-Room” relief allows an exemption for the first £4,250 of rent received, if you let a room in your main residence.

 

Putting it together

There are a number of variations on this theme, and this article only deals with the broad outline of how some schemes work – you will need to take professional advice to arrive at a specific strategy that suits your circumstances.

 

If you simply buy a property and let your child occupy it while at university, relief for a main residence will not be available when it is sold, because you, the owner, are not the occupier. There are various ways to overcome this difficulty:

 

Trust (1)

You can set up a trust which can buy the property, and then allow your child to occupy it. When the property is sold, the trust will be exempt from CGT because the property has been occupied by your child as their main residence.

 

In order to raise extra income, the child (with the permission of the trustees) can let out rooms in the property, and benefit from Rent-a-Room relief. As long as there is only one lodger, there will be no restriction of the exemption for a main residence. If there is more than one lodger, the main residence relief will be restricted (on the basis that not all the property was your child’s main residence), but nevertheless there is a further relief of up to £40,000 which will often eliminate the capital gain. If you want to do this, you will need to ensure that the trust is drafted so that you (or your wife) cannot benefit from it, so in this scenario, you have effectively given the house to the child, while still retaining some control (as a trustee of the trust) so that they cannot simply sell the place and go for a trip round the world!

 

Trust (2)

In the previous example of a trust, you were effectively giving the property to your child. An alternative is for you to set up a trust from which you can benefit, and for that trust to buy the property, perhaps using a loan. In this case, the relief for a main residence will still be available, for the same reasons as described above, but any rent received will be taxed as your income and Rent-a-Room relief will not apply, though of course the interest paid on the loan can be set against the income from any rent.

 

Joint ownership

A simpler solution, but one which does not produce the exemption from CGT, is for the property to be bought in joint names by you and your child, as “tenants in common in unequal shares” – say 99% to you and 1% to the child. You then agree (in writing) that your child will be entitled to all the rent from the property. That way, they can benefit from Rent-a-Room relief, but the property remains effectively yours.

 

Loan

Another strategy involves you lending your child enough money to buy the property, with the terms of the loan stating that when the property is sold, the amount to be repaid will include some or all of the increase in the value of the property – this is known as a “Capital Appreciation Loan”.

 

The gain on the sale will be exempt from CGT because the property is owned by your child, but all or most of the sale proceeds will be yours because of the terms of the loan.

 

In order to raise the cash to finance the loan, you could release some of the equity in your own home.

 

Your child can let a room in the property and benefit from rent-a-room relief.

 

Be careful!

All of these strategies need very careful planning and implementation if they are to work properly, and it is essential that you take advice from a Tax Adviser before trying to put any of them into effect. The strategy chosen must take account of your and your child’s financial circumstances, and there other tax considerations, such as inheritance tax, to be taken into account