Release date: June 2003

Buying a flat or house for a son or daughter to live in while studying at college or university is seen by many parents as a sound investment and that at least they will have an acceptable standard of accommodation.

A choice arises whether to buy the property in your own name, your child’s name, or to set up a trust to hold the property. With each option are the consequences for inheritance tax and capital gains tax.

Buying in your own name

Owning the property in your name, regularised by letting it on by an assured shorthold tenancy with the occupation of your child and his or her student friends, would provide a greater control over your investment.

An assured shorthold tenancy is a fixed tenancy period of a least six months with no security for the tenants once the period has expired. This type of tenancy would be appropriate as the academic year is approximately nine months. The landlord has the right to request the tenants to leave the property at the end of the tenancy on giving the tenants two months written notice. If any tenant does not vacate on the expiry of the notice, the landlord can use an accelerated possession procedure whereby a Judge can order the tenant to leave the property without the need for a court hearing.

Consequences for inheritance tax would be that the asset, ie the property, would remain within your estate and be liable for inheritance tax duties on your death. Capital gains tax would occur if the gain from the sale of the property were greater than the annual allowance for capital gains after deducting the cost of any improvements which you had made. There is no main residence exemption as you are not occupying it as your main residence. In addition, you would be liable to pay income tax on the net rental income from the property.

Buying in your child’s name

Alternatively the property could be bought and registered in your child’s name. For inheritance tax purposes, this would amount to a gift and would be exempt from inheritance tax if you survive 7 years from the gift. For capital gains, if the property is your child’s main residence then a sale should qualify for main residence exemption and no capital gains tax would be due. Complete exemption may be restricted if a number of rooms have been let, however, there is a further relief for let property, which together with the annual exemption, could avoid any liability to capital gains tax. But again, income tax may be payable on the net rental income depending on your child’s total income for the fiscal year.

Buying through a trust

Setting up a trust to hold the property is a further possibility of obtaining some tax advantages whilst retaining a measure of control over the investment. The full tax consequences will depend on the type of trust, and unless the sums involved are substantial, the use of a trust may add unnecessary complexities.

Whichever option is chosen as most appropriate for the situation, it is important to have legal advice before purchasing property on behalf of another, and in particular having legal advice before entering into an assured shorthold tenancy agreement.

David Hogg heads an experienced commercial team at Close Thornton Solicitors, providing practical and professional advice on a broad range of legal issues. This article is not intended to be an exhaustive statement of the law or a substitute for seeking specific advice. For further information please contact David Hogg on 01325 466461 or email david.hogg@close-thornton.co.uk.

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