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Buying flat for student DS(27 Posts)
I have inherited some money and wish to use it to buy a flat for student DS to live in while he's at university.
He's studying in an inexpensive city where I can buy a 3 bedroom flat for approx £150k, he can live in it with two friends and we would get a total rental income from them of about £8k pa ( we would charge them slightly below the market rent ). At the moment we are paying £5k pa rent for him.
I'm not sure of the best way to do this, in terms of legal and tax issues.
1. Do I buy it in my name alone, his name or jointly? I'm not sure how this affects capital gains and income tax.
The reason for considering joint ownership is because I want to still have some control over this money - the plan is to sell up/ remortgage when he finishes his course in four years and use some of the capital to help DS1 buy his own place and the rest to do the same for DS2 when /if he goes to university .
2. In terms of income tax, I assume he pays none on any rental income in his name as he has no other income ( apart from casual holiday work, which wouldn't take him up to the personal allowance). I'm a basic rate tax payer and any income in my name wouldn't put me up a band.
3. I assume we should buy the property outright and not with a mortgage as we can't off set this cost against rental income - is that correct ? Of course there will be other costs such as insurance and service charges.
4. If I'm the landlord, do I have a joint or individual tenancy agreement with his flat mates ? Or if he's a joint or sole owner, does he use the rent a room scheme and have an agreement between him and his lodgers?
It's not a major hassle for him to fill in a self assessment tax form, I'm more concerned that he's able to get rid of the flatmates in the unlikely event that one of them turns out to be a total nightmare.
As you can probably tell this is unknown territory for me. I know that we are very fortunate to have this lump sum and I want to make good use of it for both my children.
I should add that DS is quite a sensible lad at the moment. But I'm not willing to risk giving him full control over the asset as I'm well aware that things could change in the future and he could decide to sell up and fund a trip round the world / evict his rent paying lodgers and move in a non rent paying GF/ marry and then divorce in quick sucession.
Glad it's not just me who feels a bit clueless
Hopefully an expert will be along soon to advise.
I think I was reading somewhere about them owning it in trust... we would buy use property but have 4DC So even more complex!
Do I buy it in my name alone, his name or jointly? I'm not sure how this affects capital gains and income tax.
You don't pay CGT on your principal private residence; you can only have one of these. So if it's his place then it will be free of CGT but if yours then you would be liable for CGT (assuming you already have your own place). Ditto - you will be liable for additional stamp duty, whereas he won't.
You could lend him the money to buy the flat and have a charge on the property, like a mortgage company does. That way he owns it but you still have some control. You would have to get this properly done to be legally watertight. You can't do this if mortgage providers are involved, it won't wash.
Also, if it's all in his name then you can do Help To Buy (I assume, check that this sort of thing isn't excluded).
How long is this for? Will any savings/gains be eaten up by transaction charges (solicitors, estate agents, stamp duty, searches, surveyors, extra costs involved in letting eg annual gas inspections).
You need to look at HMO rules and licensing in the city concerned. Also what happens if the others stop paying.
Thank you both. Some very useful points.
A brief check of HMO rules show she that they apply to renting to three or more unrelated persons. So that answers the question about who should own the flat - it has to be DS , so he can let to two people and not me who lets to three.
So that also deal with CGT I think as it won't be payable on DS own home.
I like the idea of leading him the money to buy the flat but having a charge over it. I know that only covers the original loan ( say the £150k ) and not any capital gain, but I can live with that. It's a low cost town with slow or static house prices.
How long is this for? Will any savings/gains be eaten up by transaction charges (solicitors, estate agents, stamp duty, searches, surveyors, extra costs involved in letting eg annual gas inspections)
The plan is for 4 years, until the end of his studies. We are not expecting to make much if any money from any capital gain, as previously mentioned. The advantages would be
- Not paying rent for 4 years so we and DS have lower costs and he has a smaller student debt
- DS having somewhere safe , decent and secure to live
- having some control over the excesses of behaviour of the people he lives with, because he can get rid of a lodger whereas you have no control over another tenant.
Sorry if this makes me sound like a control freak, I just mean extreme anti social behaviour or not paying rent/ share of bills. I've heard some horror stories from friends about their kids flatmates.
Costs - I'm expecting to pay for legal fees, stamp duty is about £500. If it's not an HMO he doesn't need associated costs I think ? And of course estate agent and other fees when he sells.
So yes, two sets of transaction costs may well cancel out any capital gain, assuming house prices in that area stay low.
Do you know if other costs ( furniture for lodgers rooms, extra insurance and maintenance costs ) can be set off against DSs rental income ?
I would also add that if he owns the place then he can use the 'rent a room' allowance of 7.5k income tax free. If he doesn't work, then there wouldn't be no tax on the income would be within his personal tax allowance. However, you'd need to sort sth out with s lawyer to say the income is his even though you're on the mortgage.
Thanks JoJo. He only does a bit of bar work during the holidays so wouldn't earn enough to get up to his personal allowance.
Don’t forget if you own it that stamp duty will be a lot more (an extra 3% on the whole value) as it will be a second home.
I'm not convinced by this idea. In investing circles it is usually considering a bad move to put all your eggs in one basket. You should diversify your investments to get the best income and capital growth within your preferred risk profile. How does putting all your inheritance in one flat in "a low cost town with slow or static house prices" square with this principle?
Answer: it doesn't.
I know that you are worrying about nightmare scenario regarding flatmates but you seem to be wanting to solve it by wrapping your DS in cotton wool instead of letting him stand on his own two feet. He needs to be left to make mistakes, learn how to resolve the resulting problems and learn not to make the same mistake twice.
2 uni friends had parents that bought properties to rent out. Both ended up only being lived in by the student owner as no one wants to live in a house with their landlord. It didn’t work at all, the students were much more precious about looking after their place. There were rules about people visiting/staying over. It was a nightmare for all involved and couldn’t have been any profit for the families at all.
Oh dear, that's a bit worrying. I hadn't thought of that .
Three bedroom flat also worries me: two's company, three's a crowd. There's always the worry that two will gang up against the other, which doesn't make for harmony.
We considered this for DS2 - briefly. He wouldn't want the responsibility of being the property owner / owner's son. It would stop things being on an equal footing and I can see it could cause tensions.
It was a very popular model amonst my friends when I was at uni. I never heard of any problems. I also think it requires maturity and teaches responsibility - the landlord student neeeds to make sure bills are paid, garden and house maintained, boiler serviced etc. So some very grown up responsibilities. It can also work very much in the favour of the students- you've already mentioned mates rates + it means that if something breaks, th landlord is more motivated to have it fixed ASAP as they live there too.
I would check the rules about 'rent a room' where there's more than one lodger at a time - for both cgt and income tax.
Other costs could include electricity safety check, legionnaire's risk assessment. Right to rent checks, reference checks, etc. And property maintenance - not to be underestimated!
Thanks, I have checked on income tax and DS can either use the Rent a room scheme or just complete a tax return. I think the latter might be better as he can then deduct costs and he doesn't really earn much elsewhere. It doesn't seem to matter if you havemore than one lodger.
The CGT thing seems complicated with letting relief and working out what proportion of the flat he has let out for what period. But house prices in this area are fairly stable, it's nothing like London where it would be a big issue.
What happens if he marries? If the house is in his name then it is his house.
What if he doesn't want to sell after 3/4 years?
What happens if he drops out? Or decides to change Unis?
What does he actually want? he may prefer to live with 6 friends, or the days in many cities there are loads of private student flats- so effectively it is like living in halls for 3 years.
Loaning him the money/having a charge etc would need a legal agreement and that would potentially make you wide open for tax avoidance (which seems to be what you are trying to do by not buying in your name)
If house prices are static then I cant see any advantage in this and you could lose a lot of money if prices drop.
I bought my 1st house age 19 as a student. I wouldn't do that again. No real benefit. A lot of hassle and living in a house with 3 people not more was not ideal.
It's not a problem if he marries, why would it be ? ( I assume you mean how would it affect his ownership of the flat. I would have other concerns about any of my children marrying as teenagers but that's another matter ).
And if he and his wife divorce, there would be a charge over the value of the house ( a loan which needs paid back like a mortgage ) so only the capital gain would be a marital asset. And that's assuming that she would get Part of it from a short marriage, which would be unusual.
If he doesn't want to sell after 4 years he can remortgage and pay me back the loan, as he will be working by then. But I suspect he will want or need to move away for his career.
If he drops out he can contuine to live there if he wants and get a job in that town. Or sell up or rent out.
If he changes unis we can sell or rent out.
These are all the same options that are open to anyone who buys property. If your life changes or your need to move location, there are associated costs. It's one of the down sides.
What does he want ? He wants to live with a few friends of his choosing and get on the property ladder. And stop spending £5k pa on rent which adds to his debt.
Loaning your child money to buy a property is what many, many parents do. Most first time buyers rely on the bank of mum and dad. It's not tax avoidance.
And even if it were, tax avoidance ( arranging your affairs to minimise tax ) isn't illegal. It's tax evasion that's illegal - not paying the tax that you owe.
The advantage of this is that it makes c. £11k pa from an investment of £150k with no risk to the capital. As well as providing somewhere decent ( safe, clean , convenient ) for DS and his mates to live. And gets him on the property ladder.
House prices in slow increase areas don't drop much either.
I'm sorry you had such a bad experience of buying your first home.
Thanks for your comments, it was helpful to think these things through.
We have done something similar, it has worked well. Some brief tips:
I have an individual tenancy agreement with each individual tenant. Yo could have a lodger agreement in which case your son could collect income under the rent a room scheme and not pay tax on that. But that applies (I think) to a resident landlord so if you keep the income that doesn't work.
Do everything by the book even if your DS knows the other tenants - get everything signed, don't cut any corners, then everyone knows where they stand and there are no grey areas.
I actually pay all the bills and charge a flat rate for that. It's a bit more hassle for me but quite a lot of landlords operate that way.
If you make your son a part owner, then sell, he won't qualify as a first time buyer later on, but it might reduce your capital gains
I charge slightly below market rent - I'd rather have appreciative tenants.
Be v careful where you buy - we were fortunate in that we knew the area well. If you are not familiar with the city, do lots of research.
it makes c. £11k pa from an investment of £150k with no risk to the capital.
? No risk to the capital? Why?
If you want zero risk to your capital, open a saving account. The low return you get is the price you pay for the certainty of having zero risk to your capital. Anything else has an element of risk.
No one has a crystal ball. It may turn out to be a lousy investment or a great one – no one can really know. Most people who bought properties 10 years ago or so have made a killing, but over the last few years the stock market hasn’t done badly, either, and there certainly are some equity funds which have outperformed many properties. I’m not saying you should invest in shares, just highlighting that property is not necessarily a slam dunk. One could easily argue that both properties and shares are overpriced, but then what do you do with your money?
The rental yield seems very high but I’ll go with your numbers. 2 rooms at £8k, so I’d guess you could rent out the whole flat for £12k; 12/150 = 8% gross rental yield; I don’t know the area but it does look high.
As others have pointed out, are you sure you have considered all the costs? Taxes will probably be minimal, but how about the maintenance of the property, the cost of an accountant if your son doesn’t want to/can’t file his tax return by himself, etc.?
Let me come up with some semi-random numbers just to give an idea. Let’s say you buy the property for £150k but spend another £10k between stamp duty (£500), legal fees, some furniture, some minor works in the property. Your real investment is then £160k, not £150k. You rent the two rooms for £8k, but let’s say you incur costs of at least £1k per year (it’s a flat, so there will be ground rent, a management charge, the cost of servicing the boiler, etc): £7k per year. To be on the safe side, I’d say £6k to account for vacant periods (e.g. they give you notice before the summer and you only find a new tenant in September). You save £5k that you’d otherwise pay in rent. So this £160k investment makes you £11k (6+5), i.e. 6.875%.
6.9% is definitely not a bad return. However, it’s not set in stone; it could be considerably higher (no vacant periods and the property appreciates) or it could be significantly lower: if your tenants don’t pay the rent, what are your chances of recovering the money from students with presumably no assets and no income? If the property depreciates and you struggle to sell it or sell it for less than 150?
I’m not saying don’t do it – I’m just saying be aware of the risks.
If the plan is for ds to own the house, wouldn't the tenancy or licence agreement with other occupants have to be with him rather than op? (Not sure, but that's what occurs to me). So presumably means that ds is a landlord with all the responsibilities, liabilities etc.
Does ds also bear the risk of any fall in house prices (bearing in mind what op says about a low growth area but nobody really knows what the effect of brexit etc will be)?
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