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Buy a Property in Order to Avoid Student Debt

The onset of the academic year is a double-edged sword for countless university students. The opportunity of expanding their knowledge and hence improving their career prospects comes at a price as many will inevitably fall victim to financial debt. ACCA (the Association of Chartered Certified Accountants) advises that a way of avoiding this might be by investing in student property.

Chas Roy-Chowdhury, ACCA’s Head of Taxation says: “Accommodation costs are one of the largest and ongoing expenses facing university students. As an alternative to renting they – and their parents – could consider buying a property for them to live in. Not only will this provide rental income, but it can act as a sensible investment for the future. Still, before considering buying accommodation, the tax implications involved should be considered, in particular capital gains tax (CGT) and inheritance tax (IHT).

As well as tax liabilities, potential buyers should be aware of other associated expenses including stamp duty land tax, associated purchase costs, council tax, buildings and contents insurance, furniture and fixtures and fittings.

In order to ease the burden of buying a student property, ACCA offers the following tips:

  1. Decide early on whose name the property should be bought in: If it is bought in the parents’ name then even if it is the child’s only residence there is no private residence relief and so CGT will be due on gains made when it is sold. The property will continue to be part of the parents’ estate for IHT purposes. Alternatively, it can be bought in the child’s name but with parents’ financial assistance. If the property is bought in this way and it is their only or main residence there would be no CGT payable when the property is eventually sold. Joint ownership of the property between parents and child is another viable option and would mean that the proportion of the value of the property which would remain liable to IHT and CGT could be small.
  2. Remember Council Tax: Irrespective of who owns the property, if it is the child’s main residence then they will be responsible for paying Council Tax. Students’ reductions apply and this will ease the burden.
  3. Property costs can be lessened by taking in fellow students as lodgers: If the property is owned by the parents they will be liable to tax on the rental income less relevant expenses. If the child owns and lives in it, ‘Rent a Room’ relief, a type of income tax relief, is accessible. If the total gross income from renting rooms does not surpass £4,250 in a year then, subject to certain conditions, the income is exempt from income tax. If, however, the income exceeds £4,250 then taxpayers can choose between paying tax on their profit from the letting or opting for the Rent a Room relief and only pay income tax on the amount above £4,250. If the child is not earning while at university, he or she can add their personal allowance of £8,105 to the Rent a Room allowance to receive £12,355 in rent before paying tax.
  4. What happens after university? If the property is kept after a child leaves university to rent out and they no longer live there, Rent a Room relief no longer applies. In that case income tax will need to be paid on the amount of rental income received – after deducting certain expenses such as letting agents’ fees, repairs and mortgage interests.
  5. Think of other investment decisions: Buying a student property should be viewed in the same way as other investment decisions and factors such as the ease of reselling or renting the property and location need to be considered.