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An article in the ‘Times’ stated that 53% of parents plan to financially support their children through university. Many will fund via savings, however, there is an alternative method of finance to consider that allows parents to still keep their savings intact. There is also an added bonus of a minimal tax bill if correct procedures are followed.
How does this Method Work?
- The parent(s) purchase a property (outright or via a mortgage) which is legally owned jointly with the student.
- The student resides in the property (rent free!) whilst undertaking their studies.
- The property is also let to other students who pay rent to the student as owner and the student uses the rent to finance their own personal expenditure.
How Does This Work In Practice?
Many assume that when a property is owned on a joint basis any rental income received is also taxed in accordance with the same percentage proportion of ownership. For example, where a property is owned 50:50, the assumption is that the rent must be taxed using the same 50:50 proportion.
However, this is not always the case. The rent could be shared in varying proportions calculated to produce the maximum tax advantage for each owner, especially if one owner is a higher rate tax payer and the other a non or basic rate taxpayer.
Example:
The purchase deed of 54 Dorchester Place, Oxford, shows that the property is owned jointly by John and his daughter Jane in the proportion 90:10. John is a 45% taxpayer, while Jane is a student and as such is a non-taxpayer. The net rental income for the year is £7,000.
If John received a 90% share of the rental income taxed at 45%, his tax bill would be £2,835. For her 10%, Jane would have no tax liability as this income is within her personal allowance.
It would therefore be more beneficial for the 90:10 split to be in Jane’s favour. This would give Jane an income of £6,300 – below her personal tax limit of £12,500 (2019/20). The balance of £700 would be allocated to John to be taxed at 45% producing a tax bill of just £315.
John would still have £385 (i.e. £700 – £315), which could go towards any minor property repairs. The result of using this allocation is a tax saving of £2,520 per year.
What Does HMRC Need to Know?
HMRC will require confirmation of the allocation. Ensure that the rental monies are paid in the correct proportions into each individual’s bank account, reflecting the agreed share of income.
Importantly, the agreement will have no effect on the allocation of Capital Gains should the property be sold at a later date, as any taxable chargeable gain arising would be divided based on the actual ownership share, rather than the rental share.
If other students shared the property with the owner, a claim for ‘Rent a Room’ relief could be made for income tax, and so long as the property remained Jane’s ‘Principal Private Residence’, on disposal the property would be exempt from CGT.
Property Owners Who Are Married Couples
Married couples or civil partners who own property in joint names are automatically taxed using a 50:50 allocation. Therefore, this tax planning exercise only works if the property owners are unmarried. However, married couples can still take advantage of this tax saving scheme by changing the underlying ownership of the property to a different proportion, and using Form 17 to inform HMRC.
