Parents are urged to take long-term view

Posted On Wednesday, 25 August 2004 02:00 Published by eProp Commercial Property News
Rate this item
(0 votes)

Parents opting to buy property for students to live in instead.

Martin EllisYou don't need to be old enough to remember the television series "The Young Ones" to have an enduring image of the awful squalidness of student accommodation.

Parents who want to avoid this for their university-age children are increasingly opting to buy property for them to live in instead.

For parents who chose this route five years ago, the investment has more than paid off.

Research released today by Halifax, the mortgage lender, shows that prices in the top 20 university towns and cities have risen by between 60 and 160 per cent over the last five years, with 10 of the 13 university towns outside London either outperforming or matching the average property price rise in the UK.

"The government is keen to boost student numbers, and we think there will be continuing demand for student properties," says Martin Ellis, Halifax's chief economist.

"You've not been doing much wrong by buying in a university town," says Peter Bolton King, chief executive of the National
Association of Estate Agents. He points out that one of the attractions - as well as providing a comfortable environment for your child to live in - is the potential to meet costs by renting out rooms to other students.

Of course, students are not the best tenants and there will be long periods of time when they are on vacation. Parents must also consider whether they want to load the responsibility of being a landlord - chasing rent payments, arranging repairs - on to their student child.

"Rental rules can be quite onerous," warns Henry Stuart, head of the residential property department at Withers, the solicitors. "You need gas safety certificates and have to meet fire regulations."

If the house is bought on a buy-to-let mortgage, the lender will require that there is an assured short-hold tenancy agreement between the parents as owners and the child, as well as any other students who rent rooms in the house. A buy-to-let mortgage is only one of the options to consider in terms of financing a purchase. Some parents increase the mortgage on their own home
while others take out a mortgage on the new property. Some older parents, who may be approaching retirement, or already retired, choose to downsize to a smaller house and release equity to fund the purchase.

The NAEA's Bolton King warns that bearing the costs of two mortgages is not to be taken lightly.

"It's all well and good when interest rates are so low," he says. "But many parents don't charge their children rent, and will
need to be able to meet increased payments themselves as interest rates rise."

Simon Jones, of FPD Savills Private Finance, says many of the parent-student property mortgages he arranges are on a buy-to-let basis, where rental income is taken into account. He points out that managing a property that may be several hundred miles away can be problematic for parents.

Parents should be wary of investing in this type of property with only the short term in view. A student child will generally only want to live in the property for the three to four years that their course lasts and, when they leave, it may not be a good time to sell.

"You must have a fall-back position for what you will do with the property in case you can't sell it after three years," says Bolton King. "For example, will you rent it out?"

At least rental demand in these areas is not likely to disappear, with a large population of students constantly on the quest for a home. And the tax benefits of buying property for a child can be substantial, according to Mike Warburton of accountants Grant Thornton.

"If you do it the simplest way, by buying a house in your name where your children and their friends live, there are no particular tax benefits," he says.

But if, instead, they buy either via a trust, or by putting the property in their child's name, they can take advantage of numerous tax breaks of which to take advantage.

If the house is in the child's name, with the mortgage guaranteed by the parents, the child will qualify for principal private residence relief if he sells - meaning that he will not pay capital gains tax - and he will be able to claim the rent-a-room allowance (currently Pounds 4,250) if he rents rooms out to other students.

Buying a property for a child can also have inheritance tax planning benefits. If the house is an outright gift to the child it will be a potentially exempt transfer, and will fall out of the parents' estate after seven years for IHT purposes.

But for parents who don't want to put the property in their child's name, Warburton suggests that the most tax-effective way of arranging a purchase might be to hold it in trust.

Just make sure you send the cleaners round before you visit.


Last modified on Sunday, 25 May 2014 20:25

Most Popular

Deeds Office reopening good news for sellers and buyers of property, as well as the property industry

May 01, 2020
Andrew Golding Golding Property Group
Deeds Office reopening good news for sellers and buyers of property, as well as the…

Wide-spread implications for South Africa’s real estate market following COVID-19

May 05, 2020
JLL, one of the world’s leading real estate investment and advisory firms, today released…

Deeds office reopen their doors to the public

May 09, 2020
Carlize Knoesen
The Department Agriculture, Land Reform and Rural Development has announced the reopening…

Relooking green buildings in the future of the covid-19 pandemic

May 01, 2020
Brett Chrystal
The Covid-19 lockdown has offered us an unexpected opportunity to reflect on our…

SA REIT appoints Joanne Solomon as its first CEO

May 05, 2020
Joanne Solomon new CEO SA REIT Association
With her wealth of financial and property sector experience, Joanne Solomon has been…

Please publish modules in offcanvas position.