Buying a property for your children: Tax advice and how to plan

Many parents acquire a property for their children to use when they are at University. Should you buy in the parents’ or the child’s name and how does the tax treatment differ? HMO licences and borrowing also feature. As always take tax advice in advance.

Full text transcript below:-

David Court: There are people who have become landlords either by default or because they’re setting up properties to help a child at university and so on. What should we be looking for? What’s the best thing that can happen?

David Miller: I think it’s a way in which many landlords enter the market, buying a property for their son and daughter when they go to university, it provides a couple of needs. One is to provide good accommodation for your child while they’re at university, and the other is to get into the property market as a long-term investment. I think if you’re borrowing money, the model works slightly better if you have a larger property than a smaller one because I think the assumption would be that your own son or daughter wouldn’t pay rent. You’re looking for rent from two or three of their chums to help pay the mortgage. That’s a model which I think can work quite well.
You’ve got a decision to make, whether the property is in the name of the parents or in the name of the son and daughter. Again, both scenarios work. If it’s in the parents’ name, they would obviously have to declare their rental income. If the property is in the son or the daughter’s name, there’s quite an attractive relief called The Rent A Room Relief, which would mean the first £7,500 pounds of rental income would be exempt from tax, which can be quite attractive.

David Court: If you diverse that though, if it’s a situation that the property is in the child’s name, that does cause problems for the parent if they’re having to pay, borrowing on something else to take that as income. Doesn’t it?

David Miller: It does. Yes it does.

David Court: Care needs to be taken as to housing that would get you-

David Miller: You need to plan it very well because you want to ensure that if there’s borrowings on the property then tax relief will be available. As I said before, the amount of tax relief on rented properties is shortly to be restricted to a basic 20% credit as opposed to full relief on the mortgage interest. It will be less of an impact now than it was in the past. Nonetheless, it’s far better to get some relief on loan interest.

David Court: Than nothing at all.

Murdo McHardy: That brings up the whole subject of intergenerational borrowing and mortgages, et cetera, et cetera, which used to be more commonplace in the market than they are today. There’s various ways of doing these things, but you’re absolutely right. It needs to be structured in the right way. You could have a scenario where some of the parents are borrowing against their own home to help buy a flat or a property for the son or daughter. They could have it in joint names with the son or daughter. There could be guarantors involved, all different ways of financing these things, but you need to be taking the tax advice first to make sure whichever way you structure the borrowing is going to be the most tax efficient for you and allow you to claim whichever reliefs are available. I think working a consultation between whoever your lender is and the accountant are absolutely crucial in this one to make sure you get the structure, the ownership of the property right, but also the lending behind it as well.

Rob Trotter: From a practical point of view, as well, first and foremost you’ve got to make sure that what your son and daughter wants to live in is ultimately going to be a good long-term investment further down the line. You mentioned, and it’s a very valid point, about having multiple occupants in the property. A bigger property with your flatmates sharing the rent, that brings in the question of an HMO licence. If your son or daughter lives in a property with two flatmates, then there is no need for there to be an HMO licence despite there being three people in the property because the son or daughter, if the property is in their name, is actually the landlord, so is not a tenant.
If you have three flatmates and your son or daughter living on the property, that becomes three unrelated tenants. You need an HMO licence. It starts to get complicated. You’ve then also got to consider if your son or daughter owns the property and is living in it, they can’t be named on a lease jointly with the other parties because then you’ve got this unusual situation that the landlord is on the lease. They would need to draw up a lodging agreement between them and the other parties on the property to explain exactly who’s paying what rent and what responsibilities they have in terms of looking after and maintaining the property.

Murdo McHardy: As soon as you get into the whole HMO scenario, there’s different regulations for the council requirement, local authority requirements. There are different lending requirements. Some lenders don’t like HMO situations, some do.

Rob Trotter: None of which are insurmountable.

Murdo McHardy: Exactly, but the whole topic opens up new questions and new issues that you need to think about as a landlord.

Rob Trotter: Indeed. However, a well-targeted HMO property will be a good long-term investment because, presumably, if your son or daughter needs to be near university for their studies, they buy a property that’s well suited to that. When they leave, there’ll be plenty of-

Murdo McHardy: There’ll be demand.

Rob Trotter: There’s 60,000 students in Edinburgh, so there will always be demand. It just takes some consideration. There’s also the question, do we just manage it ourselves? Our son or daughter is looking after the responsibilities of being the landlord, or do we get an agent to look after it? We’ve been in situations quite frequently when we’ve actually got the landlord is this parent, their son or daughter lives in the property, we manage the property with their son or daughter along with their friends. What that does is it keeps that professionalism because it’s all very well entering into a property with some chums at university, but suddenly when there’s-

Murdo McHardy: That can go wrong.

David Court: Yeah.

David Miller: That can go wrong. I’m sure we’ve all seen that.

David Court: Talking of the situation of going wrong, something you do need to be cautious of, if you do put a property either in joint names of yourself and the child or even in that child’s name, they have a legal status. If they decide at some point to sell the property and head off to the West Indies, you have lost that. There are a number of legal obligations, I think, that you would have to consider at that point as well. I would certainly recommend that somebody would do that. Don’t let the tax situation be your only criteria in that event.

Rob Trotter: I think to summarise though, if you’ve bought a good property that suits your son and daughter, certainly at Edinburgh, when they move out there will be a market for you to continue to rent. I think you should have a long-term view in it way beyond the period of time your son or daughter is in university.

David Court: Which is what David just said, that you want to find something suitable in the first place. Then you can keep it on, perhaps, at a later stage.

Rob Trotter: Yeah.

David Court: Okay.

David Miller: Good.