University town sums add-up
Parents are being attracted by the numbers

Many families are offsetting the cost of sons and daughters attending university by giving them an early leg-up on to the property ladder as buy-to-let landlords. Both parents and undergraduates are increasingly prepared to take on buying a property and, with a son or daughter as landlord, renting rooms out to friends.

At graduation, the home can be sold, hopefully profiting from capital appreciation or kept on as an investment either if the child chooses to stay in their university town or let out to new tenants.

According to the Halifax, all university towns saw an average increase in house prices of 14 per cent over the past year, well above the average for the UK as a whole. A quarter of the 80 surveyed university towns recorded price rises of at least 20 per cent over the past 12 months.

A separate study by Landlord Mortgages (LM) suggested that buy-to-let investors in student towns could expect average returns of 7 per cent a year, using figures for a three-bedroom property costing an average £140,946 and an average weekly student rent of £60.

More than 40 mainstream lenders now offer buy-to-let loans for student let properties and some lenders are now looking at allowing the student to have the property and loan their own name.

Also if somebody buys a property as a guarantor for their child with a residential loan and lets out one room under the government's rent-a-room scheme, this allows up to £4,250 a year or more than £81 a week in rent to be received from a lodger without any income tax needing to be paid.

Other tax breaks are also attractive, for example when the child purchases the house in their name, with a parent as guarantor to the residential loan. This avoids any potential capital gains tax (CGT) liability for the parents who, assuming they have used up their main residence CGT exemption on their own home in the United Kingdom, would otherwise face potential liabilities at 40 per cent on gains exceeding £9,200 per person this year.

A combination of a student son or daughter's income tax allowance (£5,255 during the tax year which ends on April 5, 2008) and the rent-a-room allowance could potentially cover most, if not all, rental income and leave no income tax to pay.

In addition you can offset rental income against the rent-a-room allowance or against maintenance expenditure including a claim of 10 per cent of the rental income as wear and tear, and most of the mortgage interest.

You could also put the property into a trust where the trustee documentation allows you to retain control. This way, you can still get CGT relief on it as a principal private residence.

Do your homework
Calculate and aim for room rents that cover mortgage repayments. With a larger deposit and interest-only loan, you may be able to spare your own child's rent.

Consider putting the house in your child's name. Their income tax allowance and the government's rent-a-room allowance will help to reduce any tax liabilities on rent.

For homes with five students or more spread across three floors, you'll usually need a "multiple occupancy" licence from the local council costing between £100 and £2,000.

Although new rules on legal protection for deposits are in force, a student landlord letting out rooms to friends is exempt from needing an assured short-term tenancy agreement.

If you would like to find out more, please email or contact us for further information.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Your home may be repossessed if you do not keep up repayments on your mortgage.

Article date: 09.07