How does it work renting a granny annexe to a family member?

[Turnips857]

Looking for some advice on this situation please. We are looking at a property that is set up so that it has a self contained granny annexe but it is all part of the same dwelling and is within the actual house itself (so not a separate annexe at the bottom of the garden). We are considering having my mum move in with us and her living in the granny annexe.

We can see that this would potentially be very complicated in terms of the purchase, deeds, what happens when she dies if she goes on the deeds etc. She currently owns her own property which is worth approx £200k. We can afford to buy the house by ourselves without any money from her but she would never expect to live with us completely free of charge. She is also very keen to ensure that she leaves inheritance to me and my brother.

Our proposal would be that she sells her property and then comes to live with us and pays us below market rent. Let’s say £500 per month inclusive of all bills (I think the market rate would be around £8-900 if it included all bils). This would be affordable for her as she has three different pensions and receives around £1800 a month. When she sells her property she can do whatever she chooses with her £200k but I would imagine that she will want to give the majority of it to me and my brother. She has about £10k of her own savings already.

Would we be required to pay income tax on the £500 per month? Could we avoid this by just having her pay £500 worth of bills each month rather than it being sent as “rent”? She would be living with us in our home so there’s no reason why she wouldn’t pay a share of the bills anyway. We wouldn’t set up a formal tenancy agreement.

Similarly I don’t know what would happen if she chose to gift us say £90k (and the same to my brother), I don’t know if this would be considered deprivation of assets or if we would have to pay tax on a gift that large but I guess that’s a question for the money board! If she did do this then at some point we would use that 90k to pay off a chunk of our mortgage. Thanks for any advice.

Also just to note that overall this move would save her money in terms of monthly outgoings because as well as her own bills she currently pays quite a high service charge on her apartment so I think her outgoings are currently around £6-700 per month.

I think this is a lovely idea and has a good chance of working well.
If your Mum's part of the house is not completely self contained, it should qualify for the 'rent a room scheme' which means you have a tax break on the income (you'd need to look it up, I think it is over 4K per year). If not, you could probably make her area less self contained by creating a doorway into your area, and for example letting her share your laundry facilities or conservatory.

Another thought - you might ask her to pay subscriptions for eg Sky and Netflix, which the whole household could use.

It does seem that paying bills of £500 month seems the most efficient way.
Set up a joint account in both your names and get her to transfer by standing order each month. If she does need care, it will be transparent what the money is for.

Yes this is what I had thought, that she could pay tv licence, Netflix, broadband and other bills etc up to the value of £500 rather than her transferring cash to me every month as rent. If we couldn’t get that up to £500 (I assume my husband and I need to have some bills in our name for other purposes like electoral role, proof of address etc) then she could even pay for say one supermarket shop per month for us or something.

I have a similar set up here.

Rather than pay rent, my Mum buys all the food for the house every month - which benefits me to about the same amount as any rent I would have charged.

Could that be an option?

Rent a Room relief is currently £7500 pa so you wont be needing your tax avoiding 'it's for bills' nonsense

Do research deprivation of assets via age uk/ gov uk regarding gifts.

Yeah, the rent a room scheme should cover you. She will still need a bill in her name though for all the reasons you and your dh would.

Would it also not be wise to rent her house out rather than sell it?

Agreed that the rent a room scheme should cover this

For the rent a room scheme does it need to be accessible to the rest of the house? The annexe can’t currently be access via the inside of the house, you have to go around the outside and go in a patio door. Her area would have its own lounge/kitchen then upstairs a bedroom and ensuite.

However like someone said I suppose we could add a door through from the kitchen and then just keep it locked (that sounds harsh but she would also want the space to be her own private space!)

Regardless of how she pays you, it's income. Whether it's bills or food or rent, it makes no difference to the tax situation.

Treat it as rent. Keep detailed records. And as long as you're below the threshold for rent-a-room you'll be fine (you're still fine above the threshold except you'll need to declare it and pay some tax). It will also keep the arrangement transparent and above board as far as your brother is concerned.

If it's self-contained it might be subject to Council tax. (It probably should be, but it depends if the current/previous owner was upfront with the Council when they created the granny annexe).

What about contributing to major maintenance expenditure? Would you be ear-marking a portion of the monthly contribution to keep aside for repairs etc or would you expect your mum to contribute as and when?

How old is your mum and what would happen if you needed to move or downsize for some reason? Divorce, death, redundancy etc. Would you be able to afford somewhere big enough to accommodate her too?

Giving away £180k and only keeping £20k would absolutely be seen as deprivation of assets.

Her estate would be less than £325k though so there would be no tax on it when she died anyway though?

Deprivation of assets is not IHT, it's in the event that she requires social care and is means tested.

When she sells her property she can do whatever she chooses with her £200k but I would imagine that she will want to give the majority of it to me and my brother

This is either a grabby or a naïve assumption. You really need to look into care costs and not just IHT.

Is it though? Adults who live together share household expenses so where is the line drawn? Genuine question.

my brother would be absolutely over the moon if she lived with me and would have no concern at all about financial aspects because it would mean he never has to help her out as we would be doing everything for her..

It’s not grabby at all, this is what she wants. I don’t want her money, but it’s left to me and her brother in her will if she dies. So if she sells her property because she doesn’t want to be a landlord then she has to work out what to do with the cash if she’s not using it to buy another house.

@Turnips857

Her estate would be less than £325k though so there would be no tax on it when she died anyway though?

Nothing to do with deprivation of assets.

Who would pay for a care home if she needs one in the future if she's given all her money to her children?

@Turnips857

So if she sells her property because she doesn’t want to be a landlord then she has to work out what to do with the cash if she’s not using it to buy another house.

She can't just give away the majority of it, if she needs to go into a home it will be viewed as deprivation.

Ok yes thank you I see what you mean about care costs. But I’m not sure how it would be decided whether it would be deliberate deprivation of assets or not as she currently has no real care needs. If she decides she doesn’t want to be a homeowner then is she not allowed to do what she wants with her lump sum and is she expected to save it all in case she needs a care home? Again genuine question!

Just a word of warning; are you prepared to have your mother living with you? My friend had a similar set up. In fact her mother moved into a
a separate house that was adjoined hers but had a door linking them. My friend made it quite clear that although they were next to each other, they were not living together. It did not work out. Her mother would just walk in. If my friend was late home, her mother would ring and ask where she was. The mother told the children off for playing games in the garden as it sometimes killed the plants. As the mother aged my friend had to do more and more. The worse thing was when my friends sister visited her mum, she used to send her kids in for my friend to look after.

You're overthinking it. It's part of your house and falls under the rent a room tax exemption. You don't need to add doors.