With A level results out and a new university year about to begin, what’s the best way to help student children manage their money?
Although student loans are still the main source of income for most students, plenty of parents – and grandparents – also provide financial help. For many, it’s a case of helping with rental costs or providing money for specific expenses, such as a car or laptop. For others it could mean covering the majority of living costs or even buying their child a property to live in. Here, we look at some of the options parents and grandparents may want to consider.
Paying towards living costs
If you want to help your student child or grandchild with their living expenses and encourage them to stay on top of their outgoings, there are several ways you might be able to do this.
Give your child regular and fixed amounts, if you can afford to. Learning to budget is one of the biggest financial challenges a student faces. If you bail them out when they run out of money rather than giving them a fixed amount it will make it harder for them to see the merits of budgeting.
Encourage them to reduce their borrowing. It’s really tempting to spend on socialising, clothes and/or techy toys when you’re at university, but every penny they borrow will usually have to be repaid once they graduate (with interest).
Be careful not to fall foul of inheritance (IHT) tax rules when you give money away (this may be more relevant for grandparents than parents). Inheritance tax is charged at 40% on anything you leave that’s worth more than £325,000 (married couples and those in a civil partnership can transfer their inheritance tax allowances to each other, so effectively doubling the amount they can leave free of IHT). If you live for more than a year but less than seven years, IHT is charged on a sliding scale. Find out more in our guide Understanding Inheritance Tax.
You can give away up to £3,000 a year. It doesn’t matter who you give this money to and you can spread it between several different people. If you give away more than £3,000 a year, that’s fine as long as you live for seven years after you gave the money away. If you haven’t used your £3,000 giveaway limit you can ‘carry it forward’ one year (which basically means you can use it in the following year). This means you could give your child £6,000 a year. Learn more in our article Which gifts are exempt from Inheritance Tax?
Covering insurance costs
Your child may have several expensive gadgets to help them with their studies, so it’s worth checking that these are protected against theft or accidental damage. Often, a your insurance policy can be used to cover your child’s possessions while they’re at university, saving them money on paying for a separate policy.
- Be aware that some insurers will charge for this while others offer it for free and several have pretty low limits – between £2,500 and £5,000 – on contents they’ll cover in your student flat or house. It’s also worth noting that some policies don’t accept a student’s claim if something’s stolen from their room and it doesn’t have a lock on it.
Buying a flat or house
Buying a property for your child may make financial sense, but you must think carefully about what you want the property for.
- Buying as an investment. If you’re buying the property as an investment you can take out a buy-to-let mortgage. Lenders will normally expect the mortgage to cover the rent by around 125%. You’ll also need to come up with a deposit of around 25% or more. Some lenders won’t lend if you rent to family members and others don’t like student lets. That’s because if you rent to several different people it’s called an HMO – a house in multiple occupation – and some lenders won’t lend on these because they consider them higher risk than other rental properties. For an in-depth look at how buy-to-let mortgages work, read our guide to Understanding buy-to-let mortgages.
- If your child has some income, perhaps because they are working alongside their studies, you may be able to get a guarantor mortgage, which means you guarantee to pay the mortgage if your son or daughter cannot. However, most lenders only allow this to top up mortgages that would otherwise be unaffordable. One or two lenders have mortgages targeted at this market. For example, Bath, Vernon and Loughborough building societies all offer a ‘Buy for Uni’ mortgages, which take rental income into account and lets the parent act as a guarantor.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Bear in mind that here are two ways of owning a property and there are pros and cons to both:
Buying a property in your name: you have a little more control over it, but you would be liable for capital gains tax (CGT) on the proceeds when you come to sell. CGT is paid at 18% on gains from residential property if you’re a basic rate taxpayer, or 28% if you’re a higher rate taxpayer. Find out more in our guide Is buy-to-let a good investment? and What is Capital Gains Tax and how do I pay it?
Buying and putting the property in your child’s name: The advantage of doing this is that you avoid capital gains tax, but it means you don’t have much 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 (currently £12,570 in the 2021/22 tax year). Taking advantage of the government’s ‘rent-a-room’ scheme would cut the tax bill further. The rent-a-room scheme lets landlords earn up to £7,500 a year from renting out a room in their home without paying tax on it.
Tax rules on buy to let property can be complicated, so it’s worth seeking professional financial advice if you’re considering taking this route. Read our guide on How to find the right financial advisor for you if you are unsure how to go about this.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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