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July 2015

To buy or not to buy, What to watch out for when buying a student property


We've all been there. It seems like just last week that they were running around the house in their baby grows, grabbing everything and anything within arm's reach. Now, here they are in their last year of secondary school. The not-so-small children have passed their exams and are now ready to go to university.


That's the good news.


The not so good? It can cost up to 650 a month to support a student through university, and that's over and above student loans and funding, not to mention the last minute study books, phone bills and social events.


Sound like a second mortgage? Well, it could be. However, instead of paying a small fortune each month with no end return, an increasing number of parents are purchasing properties to house their offspring safely and securely. By buying a two or three bedroom property the student can select their own flatmates, enjoy relatively rent-free student years whilst contributions to reduce the mortgage are being made.


Scottish domiciled students studying full-time in Scotland are not required to pay tuition fees if studying for a first degree or equivalent. Despite this, it can still cost students 5,500 in living costs, from travel and accommodation to books and food. In 2014 UCAS reported a rise of 3.6%, since 2010, in the number of Scottish 18-year-olds applying for university, with 42,460 applicants overall. Therefore, if the Scottish student rental market continues to grow there may be no reason to sell a rental property near to a university campus once the children graduate. There are many plus points to buying a house for a student child: parents have the peace of mind that their child is housed in suitable accommodation, in a safe area and with people they like. But, if the buyer is not careful, there can also be negative aspects to the arrangement.


Income tax


Andrew Laurie, accounts and tax senior analyst from Aberdeen independent chartered accountants Hall Morrice, explains the issues surrounding income tax and rental properties. "There are a number of issues to weigh up when looking to buy a second property for your child but the most important one is income tax. Buyers will need to include any rental income in with their other income - minus rental property running costs - which could push owners into the next tax bracket of 40% or 45%.


"For this, a self-assessment tax return must be completed each year. But don't forget, 10% of the gross rent (less council tax) can be claimed as a 'wear and tear allowance' for furniture and equipment provided with a furnished residential letting" says Andrew.


The key to a successful buy-to-let landlord, and to make sure excessive tax isn't paid, is stringent filing - keep a close eye on all rental receipts.


Capital gains tax


Another important factor to bear in mind is capital gains tax (CGT). When the time comes to sell the property, any profit made above the annual tax-free allowance, known as Annual Exempt Amount, will be liable for capital gains tax, after deducting any losses.


Andrew advises, "The amount of capital gains tax paid depends on the amount by which the net gain exceeds the annual tax-free allowance with tax payable by an individual at either 18% or 28%."


Private Residence Relief


Where the property has been put in the student's own name any gain arising on an eventual sale may qualify for exemption from CGT under the main residence rules - either wholly or in part.


Andrew provides an example of Private Residence Relief. "If an individual has owned a home for 20 years but during that time spent five years living elsewhere (excluding the final 18 months of ownership) then 75% of the gain (the percentage of time living in the property) could be exempt from CGT," he says.


Rent a Room scheme


This relief is available to owners of a property who live in it as their main residence but also let out individual rooms to others i.e. a lodger. As the rent received must be allocated to the property owner(s), to reap the full benefits, the property must be in the student's name. The biggest advantage of the scheme is that the owner can earn 4,250 a year absolutely tax-free - that works out at 354.16 per month. However, unlike conventional letting agreements, money spent on wear and tear or replacing broken items cannot be claimed.


Not everyone's cup of tea


There's a lot of work involved in being a landlord, regardless of whether or not the tenants are students. If the property will have three or more tenants living there from two or more households, the property will need to be inspected and granted a home of multiple occupancy (HMO) licence.


Rental properties must have had all the appropriate checks, gas, electricity, fire safety and smoke alarms to ensure they reach the highest of standards. Not to mention that if its student accommodation, it will generally need to be fully furnished which will require significant additional investment.


Don't forget that by putting the property in the student's name it becomes a gift of the value concerned. If the property owner would like this returned following a future sale they will need to ensure that there is a formal loan agreement in place at the beginning.


Andrew adds, "Many families have really benefited from investment in a second property to help their children through university, but it can be a bit of a minefield. There are varying requirements, and in order to ensure those requirements are being met, those who are not familiar with the taxation issues should consult an expert."



Formed in 1976, Hall Morrice offers accountancy services across major sectors including oil and gas, construction, retail and service industries, with offices in both Aberdeen and Fraserburgh. Hall Morrice is based at 6 and 7 Queen's Terrace in Aberdeen and can be contacted on 01224 647394 or at accounts@hall-morrice.co.uk


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