Buying a property for your child at university: Ownership and tax

The tax treatment of buying a university property can differ significantly depending on who owns the property, both legally and beneficially. The same property bought in a parent's name rather than an adult child's name can result in a very different Stamp Duty Land Tax bill. Same flat, same money, and the stamp duty difference alone can run past £10,000. Tax depends on your personal circumstances, and this is general information, not advice.

If a parent buys in their own name

A parent who already owns a home is buying an additional property, and in England and Northern Ireland that means the higher rates of Stamp Duty Land Tax: 5% on top of each standard band, on any purchase of £40,000 or more. The rules on the government's higher rates for additional properties page are strict about ownership: spouses and civil partners are generally considered together, and where people buy jointly, the higher rates can apply to the whole transaction if any one of the buyers meets the conditions.

On a £180,000 student flat, the higher rates cost £10,100: 5% on the first £125,000 is £6,250, and 7% on the remaining £55,000 is £3,850. If the property is not the parent's main home, a future increase in value may also trigger Capital Gains Tax when it is sold. After deducting allowable costs, reliefs and the available annual exemption, taxable gains are currently charged at 18% to the extent they fall within the basic-rate band and 24% above it. Rent received from tenants will also normally count as taxable property income.

If the child owns it

An adult child who has never previously owned a residential property anywhere in the world may qualify for first-time buyer relief, provided they intend to use the university property as their main residence. Under the current stamp duty rates for first-time buyers, there is no tax up to £300,000 and 5% between £300,001 and £500,000, so a qualifying first-time buyer purchasing the same £180,000 flat would pay £0 in SDLT. If your child is buying their first property, our Lifetime ISA guide for first-time buyers also explains how first-time buyer status can affect using a Lifetime ISA towards a deposit.

If the property genuinely becomes the child's only or main residence, Private Residence Relief may reduce or eliminate Capital Gains Tax when it is eventually sold, depending on how the property has been occupied during the period of ownership.

The ownership must be genuine. Parents can provide a gifted deposit, but the gift may have Inheritance Tax implications if the donor dies within seven years. The lender and conveyancer will also normally require evidence that the money is an outright gift and will carry out appropriate source-of-funds checks. Our guide to using a gifted deposit to buy a house explains the paperwork, lender requirements and source-of-funds checks in more detail.

If the child owns the property, they will have legal control over it and will no longer be a first-time buyer for a later purchase under the current rules. Different SDLT rules apply where residential property is owned on behalf of a child under 18, as parents can be treated as the owners for the higher-rate rules.

The joint-purchase tax issue

Buying jointly can remove some SDLT advantages available when the qualifying first-time buyer purchases alone. If the parents already own another property and meet the conditions for the higher rates, the whole joint purchase can be charged at those rates. First-Time Buyers' Relief also requires every purchaser to be a first-time buyer, so it would not normally be available where a parent who has previously owned property is also a purchaser. The replacement-of-main-residence refund would not normally apply where the parents are retaining their existing main home.

The mortgage problem, and JBSP

A full-time student may struggle to meet a lender's affordability requirements alone, which is where a joint borrower sole proprietor, or JBSP, mortgage can sometimes help. Under this type of arrangement, a parent can be jointly responsible for the mortgage without being a legal owner of the property. If the child is the sole legal and beneficial owner and meets the other conditions for first-time buyer relief, the parent's existing property ownership would not, in itself, make the purchase subject to the additional-property rates. Mortgage availability and affordability criteria vary between lenders.

The lodger upside

A child who owns and lives in the property can let spare rooms to course mates and take up to £7,500 a year tax-free under the Rent a Room scheme. A household made up entirely of full-time students also pays no council tax. Together, Rent a Room relief and the student Council Tax exemption can help reduce the ongoing cost of owning the property. However, mortgage payments, rental arrangements and tax liabilities still need to be considered carefully.

Run the numbers both ways before viewing anything. If the purchase proceeds, our complete guide to conveyancing explains what happens during the legal process, and you can compare conveyancing quotes from regulated firms in minutes.