How Parents Can Avoid Student Digs Tax Traps

Buying a home for a son or daughter to live in while at university seems like a good plan for cash-strapped parents- but watch out for the tax traps.

HM Revenue and Customs is lying in wait for the unwary who fail to set up owning and renting the property in the most tax effective way.

Here are some of the key points to consider:

Capital Gains Tax

Sooner or later, the family will want to sell the house – that’s when capital gains tax (CGT) is triggered.

Mum and dad pay at 18% or 28% on any increase in the value of the property if they own the home, while their son or daughter is exempt if they own the home because it’s their main residence.

Income Tax

If the son or daughter rents out rooms in the home they live in, they can charge up to £4,250 without paying any income tax.

Because mum and dad do not live at the property, they pay income tax on any rental profits.

Uncommercial Letting

If mum and dad let their child live rent free and then let out the other rooms, the property is probably an uncommercial let. This seriously limits valuable tax breaks that allow the owners to set off profits and losses from other rental properties against each other.

HMO Licensing and Planning

Some councils are cracking down on shared student lets by making sure they have planning permission and house in multiple occupation licences. Letting a property without the appropriate licences and permissions can lead to costly fines.

A small HMO is a home where three unrelated people share facilities, like a kitchen or bathroom. This definition catches most student lets.

Investing in a buy to let to help cut the cost of studying at university is an option for some parents – but they need to make the right tax decisions from the day they sign the contract to purchase.