It's bricks and mortar-boards

YOUR MONEY Students may be better off owning their home
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The Independent Online
Children leaving home to go to university can be a heart-rending time for parents. Even more upsetting for some is the prospect of their progeny paying thousands of pounds for substandard accommodation.

An alternative to these dodgy digs is for parents to buy their children a house or flat, or at least provide the deposit and get the youngster a mortgage.

Property prices are recovering, in general terms at least. But any investment aspect aside, this can make good financial sense if the student uses one of the bedrooms and lets out the rest to fellow students to help pay the mortgage. If you do the sums right, rent from a couple of mates may cover the mortgage repayment, allowing the "student landlord" to live for free.

Putting the property in the student's name has a number of potential tax advantages:

He or she can offset rental payments against unused personal allowance, currently pounds 3,765 a year for a single person, to avoid tax.

"Rent-a-room relief" allows people letting out rooms to have the first pounds 3,250 of rent tax-free.

The student will be able to get Miras tax relief on mortgage payments. This gives tax relief of 15 per cent on interest payments on mortgages up to pounds 30,000, and is worth perhaps pounds 200 a year.

Parents can sidestep capital gains tax (CGT) liability. Capital gains on first homes are tax-free. If the parents keep the property in their own name then as a second property any gains will be liable for CGT. CGT is chargeable at your highest rate of tax on realised, after-inflation gains of more than pounds 6,300 a year.

So far so good. But who is going to want to lend mortgage-size sums to a non-earning student? Well, no-one actually. Not without someone, usually mummy and daddy, stepping in as guarantors on the loan. Alternatively, parents could increase the loan on their existing property, thereby keeping full rights over the new property, but the overall tax position would probably be less attractive. In particular, there would be no second Miras or CGT exemption.

Borrowers taking out guaranteed loans should be able to take advantage of the range of discounted mortgages available, but the lender will look at the guarantor's commitments when granting the guaranteed loan. It will use standard income multiple calculations in its decision. If, for example, the guarantor has an outstanding mortgage of pounds 30,000 on the first home, and pounds 60,000 on the dependant's place, they will need an income of pounds 30,000 to cover the debt with three-times salary.

However, mortgage companies are more reluctant to make guaranteed loans than they once were, according to Patrick Bunton of London & Country, mortgage brokers in Bath. He attributes this to the extra bother and risk, and the potential for bad publicity in the case of a default - say if the lender not only ends up throwing the student out of his house, but also ejects a sweet little old couple from their family home.

Mr Bunton names a number of lenders as worth approaching for guaranteed loans: Halifax, Woolwich, Britannia, Nationwide, Bradford & Bingley, Abbey National, Midland Bank and the Alliance & Leicester.

What you do not want is the loan to be on commercial terms. Some lenders may try to charge commercial mortgage rates - typically 1.5 to 2 per cent above standard mortgage rates, with a 75 per cent loan-to-value limit - if they think you intend to repay the loan with rent rather than salary. One final consideration for parents is inheritance tax. Any money gifted to the child through the deposit on the property will, after seven years, be free of any potential liability.

Paul Windsor, the managing partner of Windsor Stebbing Marsh, a firm of tax accountants in London, says a deposit on a student property (or for a graduate starting his first job) can be an ideal way of passing on money and avoiding inheritance tax, not least because of the likely ages of parents and child and the fact that parents by this stage may be financially comfortable.

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