The flat that dad bought may pay for children's education

EDUCATING children is an expensive business, especially if they decide to go to university. Between fees, books, travel expenses, pocket money and, particularly, accommodation, the costs add up quickly.

For many parents these expenses have to be met out of after-tax income, which can be particularly painful if you are a 40 per cent tax payer.

Property prices are at an all time low and so many parents may be thinking about purchasing a property for their student son or daughter to live in whilst at the same time generating additional income by letting out spare rooms in the property to other students.

Every little helps with the cost of funding the education, but rental profits received by the parents as owners of the flat will fall to be taxed on them at rates up to 40 per cent in the current year, rising to 50 per cent in some cases next year.

With a little advance planning, however, help may be at hand from a most surprising source – HM Revenue & Customs (HMRC).

Take a typical example where a father who is a 40 per cent tax payer purchases a flat in his own name for his student son. The flat has some additional rooms which can be let out to produce an income, the profit from which will be taxed on the father at 40 per cent.

However, if he were to make a gift to his son of, say, 1 per cent of the underlying value of the flat, he could then enter into a partnership arrangement with his son in the terms of which it could state that notwithstanding the proportions in which the property is owned, 100 per cent of all rental income arising shall be due to his son.

Consequently, all rental income arising will, for tax purposes, accrue to his son who may either not be liable to tax at all, or who may have a small income which is taxable at the lower rates. Whichever way you look at it the cost to the father of supporting his son through university has just become much cheaper.

When the property is sold, the father will retain 99 per cent of the proceeds of sale, with his student son receiving only 1 per cent.

This need not only apply to student accommodation. The same ploy would work for parents who own a holiday home which is let out to third parties, as all of the profits from the letting activity can be transferred to the student son or daughter who is paying little or no tax.

Once the education is complete, the partnership agreement can be varied such that the income reverts once again to the parents.

You should bear in mind that the above ploy will only work if your student son or daughter is aged 18 or over. Income arising to younger children under these arrangements would simply fall to be taxed on the parents.

• Ronnie Ludwig is a partner in Saffery Champness Chartered Accountants. Listen to his podcast at www.saffery.com