If you want to buy a property for your son or daughter, what do you have to do? There are certain steps you should take so you can get a mortgage (if you need one) and to comply with tax laws.
Buying a property for your child – getting a mortgage
If you’re buying the property for your son or daughter, especially if they’re a student, you may find it harder to get a mortgage than if you were buying your property to live in. You have two basic options:
- To buy the property with an ordinary residential mortgage. Here you would have to show you could afford the mortgage and that affordability would be assessed in the same way as if the property was one you were buying to live in. That means you’d have to show you could afford the mortgage for the property you’re buying for your son or daughter and any mortgage you already have on your own property.
- To buy the property with a buy-to-let mortgage. Lenders will normally expect the mortgage to cover the rent by around 125% and they would insist that those renting a room in the house are on an assured shorthold tenancy rental agreement (it’s standard among private landlords). You’ll also usually need to come up with a deposit of around 25% or more. You can find more information about an private tenancy agreements on the Gov.uk website.
SAVVY TIP: If you rent to family members, lenders should be OK with this as long as they occupy less than 40% of the space. If it’s more than that, lenders may not lend – that’s because buy-to-let mortgages are currently not regulated by the Financial Conduct Authority, but if you and your family occupy more than 40%, it becomes a regulated product.
- Some lenders don’t like student lets. A number of lenders won’t let you take out a buy-to-let mortgage if you’re planning to rent out to students. Others don’t like what’s called a house in multiple occupation (HMO). You can read more about houses in multiple occupation on the Gov.uk website .
SAVVY TIP: Some lenders will lend as long as there are fewer than five people living at the property. However, there may be additional conditions that the property has to meet, such as it must not be more than four storeys high and should only have one kitchen. You may also have to come up with a larger deposit.
Buying for your child to live in longer term
If the plan is that your child lives in the property once they’ve left university, it’s better that they are on the deeds and mortgage, says David Hollingworth of London and Country mortgage brokers, although that is not straightforward.
- You may be able to get a guarantor mortgage. With a guarantor mortgage you guarantee to pay the mortgage if your son or daughter cannot. However, most lenders only allow this to make up a small shortfall on mortgages that would otherwise be unaffordable.
Taking out a joint mortgage
Most students won’t be earning enough money for it to make financial sense for them to be on the mortgage, but in some cases it may be worthwhile. If you and your child take out a joint mortgage, lenders will insist that both of you also own the property, according to mortgage broker David Hollingworth, and this may have tax consequences. “If you own the property jointly with your child you need to think about how to structure this so you don’t get hit with a large capital gains tax bill when the property is sold.”
How to own the property
There are several property ownership options and there are pros and cons to each:
- Buying a property in your name. You have more control over it but you would be liable for capital gains tax if you sell a second property. You can read an article about capital gains tax if you own a second home elsewhere in this section.
SAVVY TIP: Capital gains tax is paid at 18% if you’re a basic rate taxpayer or 28% if you’re a higher rate taxpayer if you’re selling a second property. It’s charged at a lower rate if you’re selling other investments. You do have an annual capital gains tax allowance (which is £12,000 in tax year 2019-20) and you can take into account costs such as estate agent’s fees etc.
- Buying the property in your child’s name. The advantage is that you avoid capital gains tax, but it means you don’t have control over the property as it isn’t yours. Any rental income would belong to your child and would be taxed if it were more than his or her annual personal allowance (£12,500 in tax year 2019-20).
SAVVY TIP: Your son or daughter could take advantage of the government’s ‘rent-a-room’ scheme, which would mean that he or she could rent out a room or rooms earn up to £7,500 a year without paying tax on it. The disadvantage is that they can’t offset expenses, such as heating, lighting or insurance, against tax. You can read more about How the rent-a-room scheme works in an article I’ve written.
- Owning the property jointly. You can own the property jointly either as joint tenants or tenants in common. If you own it as joint tenants each of you owns half the property and it will automatically pass to the other when you or your child dies. It’s better from a tax perspective to own the property as tenants in common because you can specify how much each of you owns.
SAVVY TIP: If you split ownership so that your child owns the majority of the property (and lives there as their main home) your proportion of any capital gains tax bill when it’s sold would be that much smaller. You would need to have a document drawn up (called a declaration of trust) spelling out who owns what. It’s a complicated area so take advice from a financial adviser or tax specialist.
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