Helping your children by providing a student property, perhaps with a view to helping them on to the property ladder sounds a good plan but on closer inspection is fraught with problems. A legal expert suggests a solution…

Soaring rents and property prices are causing many parents to consider helping their children on to the property ladder, sometimes by buying a property earmarked long term for the children or, more often, by buying a house as the children head off to university. 

Anne Elliott, partner at Darlington law firm Latimer Hinks is urging people to be aware of the financial and tax implications of this forward planning.

Anne said:  “The idea is simple, buy the property now, let it out for a number of years or let the child at university share the property with their friends and then pass it on or sell when the child needs a place of their own.

“However, buying a house now to pass on to a child means negotiating a tax minefield, with income tax on the rent, capital gains tax and inheritance tax to consider.    Such arrangements should not be entered into without taking expert advice.” 

 With top-up fees now impacting on families and accommodation in university towns becoming increasingly expensive, more and more parents are taking the opportunity to invest in property while their child is studying.

Anne said:  “Once upon a time, parents would help their children to pay the rent, but rent is seen more and more as dead money.”

“So, many are buying a house instead, which it is hoped will rise in value while they're at university.”

“It's an investment. They're helping their children as they would have helped them anyway, but they're using the money for a deposit rather than rent. After their child graduates, they can sell the house for a profit, or keep it and rent it out.”

Anne says that buying a three or four bedroomed property to house your son or daughter and rent out to other students is not as unaffordable as it sounds especially, in these grant-free days, when you could be saddled with three years' rent bills anyway.

A study found there are currently 83,000 properties that have been specifically bought for students by their parents, a rise of 32% from 2000.  The number is expected to hit the 100,000 mark by 2010 with parents choosing to buy rather than 'wasting' money on rent.

And the tax benefits of buying property for a child can be substantial, according to Anne. “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 and the downside of the potential for capital gains tax on gains/increases in value between purchase and sale,” she says.

“If, instead you buy in your child’s name there are benefits.  But do you really want your 18 – 21 year old owning property where you have provided the wherewithal to buy the house and may also be acting as guarantor for some mortgage borrowing or have increased the mortgage on your own house to generate the cash?   I think not!”

Anne suggests that the most flexible, secure and tax-effective way of arranging the purchase might be to do so through a trust, which secures tax advantages but retains control with the parents.

For further information contact Latimer Hinks Solicitors, 5-8 Priestgate, Darlington, DL1 1NL Tel: 01325 341500, e-mail: lh@latimerhinks.co.uk or check their website: www.latimerhinks.co.uk

Trusts provide a means whereby one person can hold property for the benefit of another. As a legal mechanism it is widely used for such purposes as pension funds or charitable funds, as well as in families where one member (say a parent or grandparent) wishes to provide for another member (say a child or a grandchild) without giving the property to them outright.

The legal title to property in trust is held by ‘trustees’, who hold it for the benefit of ‘beneficiaries’.

Before setting up any trust you should seek the advice of a trust expert. Apart from Latimer Hinks above, there is an organisation called the Society of Trust & Estate Practitioners, who can provide you with a list of their members in your area - simply telephone 020 7838 4890 or e-mail step@step.org. They have a new website at www.step.org.

Another useful reference source is the HM Revenue and Customs introduction on Trusts at http://www.hmrc.gov.uk/pdfs/ir152.htm#2a