Are you considering investing in a student property for your child? Let’s explore the potential financial benefits and tax implications of this decision.
Assuming you secure a mortgage with a 10% deposit at a typical rate of 7% today, your monthly repayments would be around £2,300. The interest element of this equates to £23,300, resulting in a reduction of the mortgage balance by approximately £4,300 per year. Utility bills and other costs would amount to approximately £4,000 per year, and students are exempt from paying council tax. In total, annual payments would amount to around £31,600.
In Cardiff, students can expect to pay approximately £150 per week to rent a room. With five occupants, this would bring in about £38,000 per year, leaving a surplus of £6,400. This surplus can cover most of the other expenses and allow your child to choose their housemates, offering them an early lesson in personal finance.
So, what tax can a student landlord expect to pay?
Running costs need to be apportioned, with the landlord’s share being one sixth. This means the taxable profit before interest relief is about £34,700. After deducting the personal allowance of £12,570, the remaining amount of £22,130 will be taxed at 20%, resulting in a tax bill of about £4,426. However, a 20% tax credit is available on 5/6ths of the £23,300 interest paid, reducing the tax liability to approximately £600.
When your child decides to sell the property, they can use the profits to repay the loan and secure a sufficient deposit for their next house. Capital gains private residence tax relief applies to a proportion of any gain. Relief is given for the room used by the owner and all communal areas. In your child’s case, this would be about a quarter of the property.
Furthermore, lodger relief can be claimed for one of the rooms if they all lived in a communal arrangement. This means CGT relief can be claimed on all but four of the rooms, representing approximately half of the property and capital gain. Additionally, CGT letting relief is available up to £40,000 or the relief otherwise claimed.
It’s important to note that these reliefs have become more restricted, but they still apply if the property continues to be lived in by the owner. In most cases, these reliefs, along with the annual exemption of £6,000, will be sufficient to prevent any capital gains tax from arising.
If you have sufficient resources and a supportive lender, keeping the property as a long-term investment after graduation can be advantageous. The tax rules regarding CGT private residence relief are not lost but diluted over more years.
However, there are downsides to student letting. Understanding the rules on houses of multiple occupancy (HMOs) is crucial. As a parent, you may find yourself taking on the role of unpaid repairman and general factotum during the holidays, dealing with kitchen appliance refurbishments, pizza clean-up, and bed repairs.
Despite the potential challenges, my personal experience has shown that student tenants are generally polite, great fun, and contribute to making university life a wonderful experience for our daughter.
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