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With a parental guarantee, and assuming you secure a 10pc deposit mortgage at a typical rate today of around 7pc, would make repayments about £2,300 a month.
The interest element of this is £23,300 so the mortgage balance would reduce by about £4,300 each year. Utility bills and other costs would be about £4,000 a year and of course students are not required to pay council tax. Overall, annual payments would amount to about £31,600 a year.
Students in Cardiff today can expect to pay around £150 per week to rent a room, so with five paying it would bring in about £38,000 a year and leave a surplus of £6,400.
That is approximately what our daughter realised. With no rent to pay it was enough to cover most of her other expenses. It also allowed her to choose who she lived with and gave her an early practical lesson in personal finance.
So, what tax can a student landlord expect to pay?
Running costs have to be apportioned with, in this case, the landlord’s one sixth disallowed. So, the taxable profit before interest relief is about £34,700. After a personal allowance of £12,570 this leaves £22,130 taxable at 20pc, being £4,426. However, a 20pc tax credit is available on 5/6ths of the £23,300 interest paid, reducing the tax bill to only about £600.
When she sold the property our daughter made a profit which allowed her to repay our loan and leave a sufficient deposit for her next house.
Capital gains private residence tax relief is given on a proportion of any gain. Relief applies for the room used by the owner together with all communal areas such as the living room and kitchen – in our daughter’s case this was about a quarter of the property.
In addition, lodger relief can be claimed for one of the rooms because they all lived in a communal arrangement. This meant that CGT relief could be claimed on all but four of the rooms representing about half of the property and therefore half the capital gain.
In addition, CGT letting relief is available at the lower of £40,000 or the amount of the relief otherwise claimed.
This relief has become more restricted but not where the property continues to be lived in by the owner. In most cases these reliefs together with the annual exemption, currently £6,000, will be sufficient to prevent any capital gains tax arising.
If you have sufficient resources, and your lender is supportive, after graduation you could keep the property as a long-term investment. Here the tax rules remain helpful because CGT private residence relief is not lost, simply diluted over more years.
The letting relief restrictions would then apply, but relief will still be given for the last nine months of ownership because it will have been your principal private residence historically. The tax relief calculations can become involved but they are generous and it is worth studying the HMRC’s guidance here.
…but there are downsides
Student letting isn’t for everyone and you need to understand the rules on houses of multiple occupancy, so-called HMOs.
In my case, as the unpaid repairman and general factotum during the holidays I found myself refurbishing kitchen appliances, scraping pizza off the floor and repairing several broken beds.
There can also be problems when students run short of cash, but in my experience at least, they were always polite, great fun and helped to make university life a wonderful experience for our daughter.
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