Students are graduating saddled with growing amounts of debt, which has prompted some parents to consider the advantages of buying a property for their child to live in.

This way, parents can put a roof over their child’s head for the duration of their course, avoiding the need for them to pay rent to someone else, and can also potentially profit from renting out spare rooms and capital growth over the long term. Any rise in the property’s value could provide a lump sum that may be put towards helping their kids onto the property ladder later on, although of course this isn’t guaranteed as property prices can go down as well as up.

However, there’s plenty to consider before taking the plunge and buying a property for your child to use while they are at university.

You have to be careful about how you buy the property, particularly if you’re planning to take out a mortgage to fund the purchase. In addition, how you choose to buy the property, along with the rent you receive and any capital growth you make when you sell, will impact your tax bills. Here, we consider what you need to know before buying a property for your student child.

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Why buy and not just rent ?

University accommodation is usually rented rather than owned by the students living there. However, with rental costs for students rocketing in many cities, buying a property could be a wise financial move by parents who can afford to do so, particularly if it can be rented out to other students.

Students also benefit, having peace of mind that they have a fixed residence throughout their course, and potentially somewhere to live if they want to stay in their university town to work after their studies have finished.

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Should I get a mortgage on a property for my child?

If you can afford to, it’s generally simplest to buy the property outright.

This means that you or your child can rent to whoever you like. If you don’t have enough money to do this, you could consider releasing equity on your own home residence to free up the cash. However, this is not an option that should be entered into lightly, and comes with its own series of implications, not least that it will reduce the value of any inheritance you might have planned to leave, and that it may impact on any means-tested benefits you receive. Read more in our guide Equity release – what is it and how does it work?

If you do need to borrow money to fund your purchase, getting a mortgage on a property for your student child can be difficult. This is because most buy to let mortgages won’t permit you to let the property out to your son or daughter, or any other close relative for that matter. The reason for this is that lenders are nervous that you might not charge as much rent to a close relative as you would a tenant you don’t know, and that you may not be as strict about following up on any missing rent payments.

Most lenders will only offer you a residential mortgage on a property bought for this purpose, as it is considered a home for a dependant relative. This is not exactly advantageous: you would be paying two mortgages at once, which would significantly impact your affordability and reduce the amount you could borrow on a mortgage later on – say, if you wanted to move house. Bear in mind that if you buy the property in your own name, then you won’t be able to let out any rooms to generate rental income. If you were to buy the property in your child’s name, then they could theoretically take in lodgers and take in rent, however.

A small number of lenders offer buy to let mortgages for this scenario, under which you can rent out the property to your child and other students, and collect rental income. Bear in mind that this income will not be factored into whether you can afford the mortgage, so you’d need to be financially secure enough for this to be an option.

Some lenders also offer specialised mortgage products for students wanting to own a property and rent out rooms, with parents or grandparents acting as guarantors. These are sometimes called ‘buy for uni mortgages’ or ‘student mortgages’. Unlike standard buy to let mortgages, potential rental income is factored into affordability and it’s assumed that this will be used to pay off the mortgage.

As this can be a complex area, it may be worth seeking professional advice on the mortgage options that are available to you. 

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 1,000 reviews.

How do taxes work when buying a property for student children?

Income Tax

If you buy the property in your own name and let it out to other students while your child lives there, then this income will be subject to income tax at your marginal rate.

If you buy the property in your child’s name then any rental income goes to them, and is taxed accordingly. If this income falls below their tax-free personal allowance, which is the amount a person can earn before they start paying tax (£12,570 for the 2023/24 tax year) then it won’t be subject to tax. That’s unless they have another job while studying that pushes their income over that limit. Even in this case, tax might still be avoidable under the government’s Rent a Room scheme, which allows them to earn up to £7,500 a year from a lodger before paying tax.

Stamp Duty Land Tax (SDLT)

How much stamp duty you pay will depend on whether you buy the property in your own name or your child’s.

If the property is purchased in your child’s name, then stamp duty is only owed if it is bought for £425,000 or more, as they will (most likely) be a first-time buyer. If you buy in your own name, however, then assuming you have bought property before, this threshold is lowered to £250,000.

Remember, however, that purchasing a second property also attracts a 3% surcharge. Once again, buying in your child’s name instead would avoid this, but it may not always be possible or wise to take this route.

For a more comprehensive guide to SDLT, read our guide Stamp Duty explained.

Capital Gains Tax (CGT)

If you buy a property for your student child in your name with the intent of selling it later on, then it will be subject to capital gains tax on sale. For higher-rate taxpayers, this currently stands at 28% of the profits for the 2023/24 tax year.

However, if the home is purchased in your child’s name and they are the sole owner, then – assuming that the property is their main residence – they will likely not be liable for CGT when they come to sell it. Technically speaking, CGT is still charged on a main residence if part of it has been let out under its current ownership. But an exception applies if the renter shares living space – a kitchen, bathroom, living room and so on – with the owner, therefore classifying them as a lodger. As this will most likely be the case for your child, they should still be exempt from CGT.

Inheritance Tax (IHT)

Buying a property in your name, as you might expect, means that its value is included in your estate. The property may therefore be subject to inheritance tax on your death if the value of your estate exceeds the current £325,000 threshold at which this tax becomes payable.

Purchasing it in your child’s name, on the other hand, could make it exempt, as the cash used to buy the property would be considered a gift to them. However, under current rules that’s assuming you survive seven years after making this gift, as if you pass away within this timeframe, the money is subject to IHT.

Should I buy the property in my child’s name?

Current tax rules make buying the property in your child’s name a much more attractive option. However, this route would mean that your child would become the sole owner and give them a great deal of extra responsibilities at both a young age and a very busy time in their life. It would also mean having no control over a very valuable asset that you’ve paid for.

Bear in mind that if you are considering buying jointly with your child, or acting as trustees, then the tax implications will be much more complicated, and you should seek personalised financial advice.

I don’t have a child, but I’m interested in letting to students

If you don’t have a child at university, you may simply be interested in investing in student buy to let properties. However, bear in mind that student buy to let is considered riskier than regular buy to let properties by some, as students are usually not earning much, if at all, and tend to rely on a loan or a guarantor to pay rent. As such, the student market is often recommended only for experienced landlords, and you should do your research into the different types of student buy to let mortgages thoroughly.

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 1,000 reviews.

You can read more about buy to let in our article Is buy to let a good investment?

Finally…

If you are considering buying property for your student child, you should of course make sure that your child is happy with your plan. Your priority should always be making sure your child has a rewarding experience at university, and two major factors in this are a sense of independence and a healthy social life.

It may be that your child is uncomfortable with receiving such a generous gift, for example, or would prefer to rent with their friends. They may also dislike the idea of living in a house where their roommates pay rent to their parents, or owning the property and charging rent to fellow students. So give careful consideration to how the scenario will impact your child’s life before going ahead.

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