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.

I would assume she’ll need to pay council tax as it has its own door.

Someone upthread said it depends if it’s considered part of your house or not and one way of determining this is whether or not it can be accessed from the rest of the house.

Not if it's part of the main dwelling.

It’s a patio door on the back of the house. The current owners son lives there and doesn’t pay separate council tax as far as I’m aware. Could be disputed I guess though.

Ok, so it's naivety. I did say there were two options based on the information and assumptions you chose to share with us.

If she has to go into care they will claw back the gifts as deprivation of assets. She could put it into investments to boost her income, and still transfer a reasonable amount as gifts you and your brother annually whilst maintaining a reserve in case her health deteriorates in the future and care has to be paid for.

Even though the value of her estate is below the IHT threshold, blundering through her finances in size 10s without watching where you tread can have significant future consequences if you get it wrong.

Is it attached? Rather than a building in the garden? I have a garage conversion annexe and it has its own front door but as it's connected to the house it's considered part of the main dwelling and not liable for separate council tax. Sorry just realised I'm answering the wrong question! Nobody is going to come and inspect your house under rent a room. You don't have to declare it to anyone or fill in a tax return or do anything apart from not charge over the threshold. Honestly don't stress about this.

Yes it’s naive which is why I’m asking questions before I do it. Obviously my research will also extend beyond mumsnet but it’s somewhere to start!

how far back would this go though. Obviously it’s impossible to say how long before she needs any care but if she gave me a lump sum 10 years beforehand would that still be DoA?

If a granny annexe is occupied by an elderly or disabled relative, they are exempt from council tax.

If she does not have any care needs at the moment then it won't be seen as deprivation of assets.

Deprivation of assets is when someone knows they have care needs and gets rid of money in order to avoid paying them and have the public purse pay for them instead.

(I used to work doing financial assessments for this).

She can gift you money and it will only be subject to IHT if she passes within 7 years of the gift.

As you say, if she jointly buys the house with you it will be complex when she passes. She could buy with say half her house proceeds and her share in the house passes to you, and leave the other half to your brother in her will, however if she does develop care needs in the future his earnarked half could diminish significantly.

Here's HMRC's internal manual guidance on the subject
www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4004

If she pays you rent, that may have capital gains tax implications when you sell the house if the annexe is treated as a separate property. You need to get specialist financial and legal advice.

I think so too

It sounds like a good idea on the face of it but as others have pointed out it could get complicated and backfire on you over the long term 😬

That's the black and white.

If you know you needed care and gave away your cash to avoid having to pay for your care, that that is definitely DoA.

But there is a grey area if care isn't currently needed but a future need for care was reasonably foreseeable. You'd have to argue this one, and who knows what the guidelines for this will be in ten years time.

There is no time limit for a DoA assessment.

tax wise for you - yes the rent a room scheme will cover you. It’s for people with lodgers etc so doesn’t have to be self contained.

you have no way of knowing if she’ll need a care home in future - sometimes care from a relative or carers coming in isn’t sufficient, hopefully she won’t or she won’t need one for long but it’s always a possibility.
bur even if she still had her own home or cash/investments in the bank, she’d need to self fund anyway.

only difference is (assuming if you’re in England), if she needs carers coming in, if she was asset rich/cash poor (ie all her money was in her home she was living in) she might not need to pay the full cost of care whereas if she has the cash from selling it then obviously she would

I think it sounds like a great idea.

Yeah might be something they’ve done which the council didn’t know about.

Sorry just to answer a few more questions

She currently is 75 and has no health or care needs. Lives independently in a second floor flat with no lift. Walks miles every day, catches the bus everywhere, does salsa dancing.

We would not anticipate asking her to pay for any works that need doing in the house unless they were something like she fancies painting her bedroom a different colour. It would be our house and we would be paying for any repairs or maintenance. I know if for example the shower in her ensuite broke then she would be horrified if I didn’t let her pay to get it fixed but those would be my terms and I expect in practice what would happen is that I would pay for the repairs and then she would want to say thank you by paying for us to have a meal out or something or give us a voucher for somewhere. Major repairs like a new roof would apply to the whole house and would be funded entirely by us.

I’m not sure what would happen if me and my husband got divorced. That’s something I hadn’t even considered, thank you.

She could pay you a monthly amount of money that is surplus to her needs and comes from her monthly income and this would be IHT-free. My mother did this with my siblings. Each month they got £400 towards their mortgage/school fee costs. No quibble from HMRC when we completed the forms after her death.

This is similar to the set up we have with my parents.

However, we asked them to pay the value of the annexe to us in cash when we bought the house we all live in. The annexe is separate to the house, and is entirely self-contained. We split bills (have you thought about bills?) fairly equally because they have the heating on a LOT whereas we just layer up in the main house.

Deprivation of assets is definitely something to consider, but if she doesn't reasonably expect to have any care needs in the future based on her current situation then it is less of a concern. I'm quite risk averse though, so in your situation I'd think about what I'd do if the local authority pursued me for the rent she'd paid at a later date and perhaps invest it rather than spend it.

Finally, I'd think about how it would work practically. Are you able to have honest and open chats with her? I've had to speak to my mum multiple times about boundaries, and what she can expect of me and my husband and what she can't. If I couldn't be clear with her about this sort of thing it would never work because I'd just end up being taken advantage of, and so would my husband.

She does a little childcare for us, and we wouldn't have been able to buy this house without their financial contribution, so it does have pros and cons, but think carefully about stuff like what you'd do if she needs a live-in carer later in life - would she expect them to live in your house? What if the annexe needs a lot of work - who would pay for that? How much time/patience do you have when it comes to helping her out? Be really, really honest with yourself. It can work, but it's absolutely not stress-free and can cause family disputes about money etc in surprising ways.

@Turnips857 my biggest concerns aren't to do with deprivation of assets ( if she has no care needs that could be foreseen - I don't think the council could say DOA) nor IHT if she gifts you money as sounds as if she is under limits anyway unless she has a big pile of cash at bank , as well as her house)

My biggest concerns would be the following

1 - what if situation changed and you wanted to move- if she has given you all her cash it kind of ties you in to this arrangement - same applies if you divorced and may well not be able to afford anything again with an annexe etc

2 if she did need residential care and was no longer self funding- she's going to have to like it or lump it what's she's given - same applies if she needed care 'at home'. If she doesn't leave herself with enough cash to be self funding then she will get what she is given - which probably will be as little as they can getaway with as it will be noted she has family around.

I don't think it's bad idea in principle but I think she should leave herself with at least £125k and maybe gift the rest - I also think it may be less hassle on the DOA front - leaving herself with very little may I think invite much higher scrutiny - obviously external care may or may not be needed but better to presume it will

Ok I’m a complete donut and realised that half of her £200k from the property isn’t actually hers, it’s in trust from when my dad died. At the moment the trust technically owns half of her property. So if she sold and wasn’t buying another place the trust would be dissolved and me and my brother would get £50k as we are the sole beneficiaries of the trust. She’d have £100k cash remaining.

but I guess all of the above still applies we’re just talking about £100k rather than £200k.

Based on what everyone has said I think then I would encourage her to invest the 100k rather than gift it. Protects against future DoA claims and also gives her additional income from investment if needed.

@Letstheriveranswer

If she does not have any care needs at the moment then it won't be seen as deprivation of assets.

Deprivation of assets is when someone knows they have care needs and gets rid of money in order to avoid paying them and have the public purse pay for them instead.

That's not strictly true. You don't have to have current care needs for it to be considered deprivation; it's not black and white but they can go years back. It's not unreasonable to expect care needs in the future and such a massive amount of money given away and the remaining savings not enough to self fund care would be seen as deprivation. If OP mum had £20k and gave away £18k it probably would not be deprivation and she would already be under the amount for assistance, but giving away £180k in your mid 70s almost certainly would be deprivation

I live in an annexe to my DD's (and Son in Law's) house. We have a joint account which is just used to pay all the bills that we split according to how much we estimate is attributable to each of us. The bills include council tax (just one property), electric, water, tv licence, etc. This is not considered rental income as it is just paying for an appropriate share of the bills, no rent changes hands.

Providing there are no current care needs and none anticipated, the funds from the sale of her property can be given away, but I wouldn't recommend she does this without giving it a lot of thought. It would be better if she paid for a share in the property so at least if something happened (e.g. Divorce or it just doesn't work out), she can get some money back to start again alone. If you live in the same house, if she does have care needs, it can't be sold to pay for them and I believe it is exempt, but check that with someone who knows more than I do.

When she does die, she leaves her share in your house to you and your brother equally. Then, you would agree to pay your sibling his share as you would keep the house rather than sell it. The house would be valued at the date of death and you would need to pay out half of her share. I hope that makes sense!