Please help settle a family argument

[Forester1]

This is quite long -

We recently purchased a property with a large unrenovated annex. The plan (made prior to purchase and in agreement with the PILs) is for the PILs to pay to convert the annex and they then move in for the rest of their lives (we are expecting 20+ years). They will sell their current home and dh and bil will get a significant share of the proceeds.

So the question is what is a fair financial arrangement so that neither brother loses out.

To add some figures : the cost of conversion is expected to be £150k, the immediate uplift in value after conversion £200k, we spent £150k more than we otherwise would to get a property with this annex. No further contribution is expected from the pils.

And to add some restrictions : we don't want either PILs or bil to own a share of the property and we don't want any family row at time of inheritance so either any true up needs to be made now or the position needs to be crystal clear in any will. Also we will not be able to sell up for the duration.

Any suggestions / thoughts gratefully received.

Thanks

I know this is not the answer you want but have been in a similar position and we did this:

Property was purchased by DH and I
DM gifted us 1/3 the purchase cost of the property
DM funded renovations required on the annexe (and a share of some of the renovations required to the whole property e.g. drive)
Following purchase a Deed of Trust was drawn up detailing what % financial interest was due to each person on death or divorce
DM paid no rent but a share of the utilities
DM died
Property was valued, Dsis inherited 1/6 (50% of DMs financial interest in the property) the value of the property

As others have said there are many, many reasons why you may need to sell the property. In our circumstances the one that concerned me most was me dying - would DH and DM be equally committed to maintaining the arrangement? We all recognised that in event of divorce then we would all probably end up living somewhere else.

Without anything in writing your PIL will have no security. From what you say they seem comfortable with that. To be blunt after my DM made a significant financial investment into our home I made it a condition that the Deed of Trust was drawn up. It wasn't a perfect protection but DM, DH, Dsis and I agreed it was as fair as it could be.

Again sorry if this is not a solution you can consider I just thought my first hand experience was worth sharing.

It's immensely tangled. Why are you so keen for your PIL not to have any shared ownership of the property in exchange for their money? The sums you are talking about are well under the limits for inheritance tax.

I think the solution by bluestringpudding was the sensible one. Your parents retain ownership of the current property and rent it out, using the rental income to rent the annex from you. You are getting the long-term capital gains from the annex so you should be paying for the refurbishment not your parents (but if they want to give you a year's rent up front to pay for the refurbishment that's OK.

Having them live there rent free will cause nightmares in the long run.

Whatever you decide will need to still seem fair if there is a massive property crash and the money they put into your property becomes effectively worthless.

OK so have been mulling over the various comments. We are coming to the view that we convert the property and give PILs a choice on whether or not they want to rent it. In practical terms we would suggest that they loan us the money interest free - in exchange for being able to design /spec etc the property and that the rent reduces the loan over time until the loan is repaid and then they pay us rent. However we could fund the conversion without their money but we would need to keep costs low.

This isn't a perfect solution and puts the onus on them to decide whether they want to live here even though it means that their "estate" will reduce and puts bil in a worse position (probably) than our original proposal. It does have the advantage however on being clear to understand, means its pils decision if they want to go ahead and easier to break the arrangement if not working out. We wouldn't ask PILs to decide until they've discussed with bil.

If they don't want to proceed we would convert and rent to a third party.

Comments welcome.

I'm also going to head over to the legal forum to see what the tax etc implications might be.

If you want complete ownership and have the funds for a less elaborate conversion, I would go down this route. I would forgo the interest free loan - presumeably, you would still be keen to have your pils live in the annexe? Really, who charges their parents/inlaws if they live in the granny flat/annexe? O.k, a contribution towards the bills maybe and that's a maybe. Bottom line, for most people, the main reason is not a financial one let alone one that seems to be causing quite a bit of discord (bil is a tad entitled btw!)

I definitely think that would be the best option, it's much clearer all around.

I've described it as an annex but that does undersell it - it will be 2/3 bedroom once converted with own garden and a garage - which is why the cost of our property is significantly more than it otherwise would have been. That and the expectation they are going to be there for a long time is why we are looking for a contribution (in some form) from them.

I think your plan sounds best overall as the onus remains on your PIL to decide the fate of their money. It will reduce the value of their estate. So what? I know that sounds flippant but really the process of retirement is about living on your accrued assets so a reduction in their value is inevitable. Your BIL is just going to have to suck it up because the only way to truly preserve the estate is to support them entirely yourselves now with a view to a pay off later, which ain't going to happen!

You BIL is going to be pissed off. He will feel like he is "worse off" but unless you're somehow going to charge him money then he isn't really is he? Just perhaps a little bit less better off IFYSWIM. An inheritance is a (in this case sizable) windfall, a gift, a chunk of money that you don't have to earn. It's not his money. Your PIL could live for another 20 years, so it's no where near an inheritance yet. You're taking on the responsibility of having them in your home indefinitely so if, in the end you get some gain in the value of your home it's really none of his business is it? It sounds like he views his parents money as his own and it's not.

Thanks NickyEds - I think you've expressed our thoughts very succinctly

A few legal points:-

1. You may not get planning permission to convert it to a separate dwelling with separate council tax and a separate new title deed at the land registry in the parents' names. Where I live that would be refused but it will depend on your area.

1. If you do the latter then the parents will continue to own this "new" property attached to yours which is fine and they can fund the council tax, heating etc BUT you must also think about inheritance tax. Will the value of their assets including this at death of both of them be above the IHT limit? If so then it is better to give both sons as much cash now as possible and survive 7 years in which case no inheritance tax has to be paid.

PS I assume you two and husband's parents will all at the end of the day just each own the one property? From April if they might own two there will be an extra 3% stamp duty to pay which is a bit of trap now with more complex family arrangements, parents guaranteeing mortgages and in situations where people are divorcing or needing bridging loans.

In respect of the BIL's PoV if the IL's give each brother £150k now, BIL can invest his in a house he can live in or rent out, i.e he gets the benefit. Meanwhile your DH does not get the benefit for the next 20 years.