If you have a child aged 18 or over going to university this September, don’t miss out on the “enormous potential” to enjoy tax-free capital growth on the property they live in, say Carl Bayley and Nick Braun of Tax Café.
Say Patrick gives his daughter Joanna £80,000 as a deposit on a four-bedroom house and acts as guarantor for the loan needed to buy it for £150,000. Joanna lives there for the next three years, living in each bedroom at some point and renting out the others to fund mortgage repayments. The students share three communal rooms so Joanna is effectively using 60% of the house.
After graduating, she rents it out for another five years, finally selling for £280,000 and making a capital gain of £130,000. Once totted up, her principal private residence relief comes to £78,000 (£130,000 x 3/8 x 60% for the first three years, plus £130,000 x 3/8 for the last three years) and she can also claim £40,000 in private letting relief, bringing her total relief to £118,000.
This leaves her with a taxable gain of just £12,000 (only just above the £10,600 CGT allowance). A trust may be used to avoid handing over so much money to a child.