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University can be an expensive time these days. The introduction of tuition fees and the system of student loans have combined to mean that there are increasing pressures on the finances of both the student and the parent. Many students leave college heavily in debt.
Inevitably parents will be called on to help in many cases and will look for ways to do this as painlessly as possible.
One of the main problems is the funding of accommodation. Housing is expensive as we all know but possibly renting a property is not the best long-term use of the money. Obviously students are not going to be in a position to buy property themselves so it is left to the parents to consider what to do and how to do it.
Firstly, a parent might consider buying a property for the child who would then rent part of it out to fellow students. The parent would obviously have to guarantee the mortgage as no lender is going to risk making loans to a group of impoverished students without that comfort.
There are practical problems, however. Firstly, many parents would be uncomfortable about the idea of such a valuable asset as a house being owned outright by someone in their late teens or early twenties.
Secondly, there may be other younger brothers or sisters hoping to go to university later on and funding an arrangement like this for all of them might be out of the question.
Thirdly, many lenders don’t like it. Frequently banks or building societies prefer to have the property in the names of the parents rather than use some form of a guarantee.
So you might think that the parents should own the property and pay the mortgage in the normal way. When the student has finished at college then the sale proceeds go back to the parents and could, if so wished be used to fund other children in the same way. Problem solved.
Well no. One of the main attractions of buying a property like this is to benefit from an anticipated increase in property values. Any such increase would be subject to Capital Gains Tax (CGT) on sale.
So what is the solution? Can a property be held in the names of the parents giving them control over the proceeds of sale but still avoiding a CGT problem? The trick is to use a suitably worded trust deed for the property which enables all of these objectives to be met.
The property can still be legally owned by the parents satisfying the mortgage lender. The property can still be sublet to other students. The parents can decide when or if the property is sold. They can also decide whether the same funds or even the same property is used for other children. Finally, with the right trust document and one or two other technical steps then the Capital Gains is also avoided.
If you have student children and are thinking of buying or funding accommodation you should certainly look at this option.
Graham Arnott, Tax Consultant
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