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.

https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/hs223-rent-a-room-scheme-2024

"You cannot use the scheme if the accommodation is: not part of your main home when you let it; not furnished: used as an office or for business; or in your UK home and is let while you live abroad.

I'd consider putting a door in.

I’ve just looked again at the listing and they have very cleverly got a door in the annexe lounge that connects to the rest of the house and then it’s essentially got a single sheet of plasterboard over the hallway side and then wallpaper over. So from the annexe you can still see the door frame but from the hallway you can’t see anything at all. So obviously when they built the house (it’s a fairly new build) it was one house and they have subsequently separated the annexe. I think if we just had my mum living with us then it wouldn’t attract much attention from the council but if we were to rent it on airbnb then they might argue it’s a separate dwelling and try to charge council tax.

This. My understanding is something about whether your mum can use the main entrance of the house to enter her annexe. If so then I think it counts as rent a room. If it’s got its separate entrance then May be worth putting a door in somewhere.

For the bills idea I think id make sure all the direct debits etc. are set up from her account to avoid any disputes about it.

So there are two things that might be helpful. To investigate further.

Firstly you have a tax free income allowance for renting so as long as the threshold doesn't change (i.e. government doesn't change it) and the income you receive (doesn't matter if it's rent bills etc, if it comes to you it's income) is approx 7k, and earnings aren't taxable if within the same house i.e. renting a room. **Might change in future, get exact amount. So £500 PCM is around 6k annually, which wouldn't be taxed, as current threshold is just over 7k. But you'd have to declare on self assessment if you do them (you should, but if you aren't self employed you won't be asked to).

2. You can get creative with inheritance tax. Get proper advice but at the moment, you have a personal threshold and the amount of tax changes, each year over 7 years, so as long as mum lives over that period you'd personally not have a tax burden unless something unforseen happens. This may change though, if government changes it. Also it's per person, you could have half of your half to you and half to your husband, or even some to your kids etc and all persons, have their allowance. BUT that obviously comes with risk and if is THERE money, not yours if it's given per person, so something to get advice about. I dont know much about the tax liability or rules around deprivation of assets. Only gifting allowance and threshold when I was gifted some advanced inheritance. Again, this may be subject to change just what it is right now.

Best to get proper advice from an estates/financial planning professional to really understand these things and make sure you do it in the right way, such as a family trust, or other tax efficient methods.

Good luck!

You'd have to get planning permission from the council to approve it as a separate dwelling. If they don't agree it is, it isn't!

I’m a financial planner - please don’t take advice on this form mumsnet. You need some proper financial advice on this. There are several factors to consider here from IHT, to care fees, to your own tax planning. It’s not straightforward.

OP, this always feel like a wonderful idea at the time and I hope it works out for you all. We had a similar situation and it went horribly wrong, with my MIL having to move out. If that happens the financial entanglements are the least of your worries. It'll get nasty. Here's my view

• the 200k should be kept in the house (or used to buy another) and she keeps this as a rental. If you're worried about IHT she can write that into a trust. The rental income can be kept by her or divvied to you and your brother.
• this means that if it doesn't work out she has a property to move back to. There's no "but I made financial decisions because I never thought I'd have to think about it"
• have honest conversations and be clear about everything. Today - do you want every single meal with her? Evenings in front of the tv? How blended will you be? For the future - what does "care" look like for you and where's the line. What about if she gets frail and needs constant but non medical support - what are you willing to do? What if this restricts you - you can't go on holiday etc? Who pays for respite care for you?

-for care you need to bear in mind that once she's deprived of assets given she's living with you you're going to have a VERY tough time persuading the LA they need to do anything. You're there to see to her needs - why would they pay

There is no way to know this. Local authorities can claw back money from any year if they think that it was intended to be a deprivation of assets. There isn’t a predetermined time frame in law.

the other thing to factor in which is a big one is the local authority care homes are not great. Most people wouldn’t choose to go into them. And yet if she has no assets, she’ll be placed wherever they put her. It’s a big practical impact of doing what you’re proposing that many people don’t think about until they see the reality. She and you will have little choice.

Sorry - I pressed post too soon.
Who is going to be responsible for keeping everything clean and tidy? (MIL was tidy but HATED opening the windows. There was mould everywhere by the time she left)

Giving away a large lump sum of money at an older age, coinciding with a move from living alone to living where a family could potentially provide care would be 100% seen as deprivation of assets. There's no time limit on this, so it doesn't matter how far in the future care is needed. There's no justification for her giving away her lump sum which could a) provide her with an income, and b) pay for future care needs.

At around 5% income from £200k could bring her an extra £10K per year income for her, and make her life much more comfortable.

It's an odd premis that one must give away any money they don't have an immediate need for.

I think £500/m under rent-a-room for use of the annex seems sensible though.
Just be aware of what you are setting yourself up for. Are you prepared to be a full-time carer in the future (including dealing with personal care and/or dementia care if needed?). It's easy to think it'll be OK whilst your mum is in good health and you enjoy her company, but that won't necessarily last forever. Being a full time carer is incredibly hard and thankless.

Was she married?

She doesn’t need additional income though. She’s very comfortable and easily lives within her means and saves each month and periodically makes small gifts to grandchildren etc from her pension.

I can see what you mean about potential DoA given her age and moving in with family etc but it is a strange premise that if someone has money they’re not allowed to spend it as they wish. It’s one thing if they are specifically giving away money to become immediately eligible for benefits but if that’s not the case then it’s weird that people can’t give their money to who they wish. She could spend £20k on a holiday to Australia and that would be fine but if she wanted to give 20k to her grandchildren that would be seen as DoA.

No specific advice other than I strongly recommend getting some proper legal advice around this (ideally independent advice for both you and your mum). My SIL's family are in the process of attempting to unpick a very difficult situation where a relative has moved into an annexe in their child's home, sold their home and disbursed the cash (all of which has now been spent by various parties) and now the child and their partner are divorcing and granny is faced with the prospect of no home and no cash to buy a home...

@Turnips857 as you have said below though - only £100 k is hers anyway as you and brother would get 50k each as half the flat is in trust - being honest here, can you afford to buy this place without her money? It's not a criticism but you seem keen to get hold of cash at this point.

She could spend £20k on a holiday to Australia and that would be fine but if she wanted to give 20k to her grandchildren that would be seen as DoA.

Neither would be seen as deprivation, as she would have £180k left. It's not so much about what or how you spend the money but more about whether you are keeping enough to cover future care costs. Pensions etc would have to be phenomenal to cover care home fees, atm DM is paying £1400 a week for hers, had she given away £180k 20 years ago, that would be considered deprivation.

Have you considered what could happen if your health deteriorated or you pre- deceased her. Would your DH be willing to have her continue to live in the annex?

Which is good, but life can change in a moment, sadly. Six months ago, my 77 y.o. mum stayed with us for 6 weeks (from overseas) following my own major surgery and cancer diagnosis. She was in great shape, walking every day, yoga, and has always eaten healthier than anyone I’ve ever met.

Six weeks ago, she was diagnosed with end-stage pancreatic cancer. Had no symptoms until it had spread everywhere. She’ll need a lot of help, but doesn’t have long to live. Her aunt died last week at 96. She’d been in a care home and suffered from dementia for 15 years needing care. £200k is not a massive nest egg.

I would suggest she meets with a financial advisor to discuss estate planning. Expert advice would be prudent for everyone.

Yes she was married to my dad. His half of the house was left in trust to me and my brother so if she sells her property and doesn’t buy another one then the trust would be dissolved after three years I believe. So then she would have £100k remaining.

Yes we can. Don’t be so rude please. I’m not keen to get hold of her cash at all. We can afford to buy without any of her money or without any rental income from the annexe at all. I’m trying to make sure I am around to look after her if/when she needs help. And to enable her to see her grandchildren daily (and no I won’t be asking her to provide childcare before anyone accuses me of that).

I just know exactly what she will suggest if she does sell her flat. She doesn’t want to be a landlord and rent it out it would stress her out massively. She is very proud that she and my dad managed to purchase a property (something their parents couldn’t do) and she wants to leave us an inheritance again which her parents didn’t manage as they never earned much and didn’t own their own property. So I want to make sure that we are aware of any potential implications.

Yeah this is my main concern at this point

This is also a concern thank you

I can see two immediate issues.

One is that she has to go upstairs to go to bed and use the bathroom. One day she might be unable to do that. Would you be able to install a stairlift in that eventuality? I was quoted about £4,000 for one in my house when I was considering my mum living with me. (That was second hand and reconditioned.)

The other is that if she needs to go into a nursing home one day, she will need the money from the sale of her flat. She really mustn't give any of that to you or your brother now. My mum's got a similar pension and her nursing home in the midlands is £1,000 per week, so about £2,200 from her savings has to go on her accommodation every month. If she gives away all her money there might be a huge problem in the future.

At the moment the son doesn’t pay council tax

but that doesn’t mean you won’t be caught and forced to pay council tax.

having a kitchen, lounge bathroom and bedroom, there isn’t any feasible way that council tax wouldn’t consider this a separate dwelling

ive known posh sheds next to the house with a kitchen inside considered separate and then valued

its a risk to take, but you must be aware they can back date the tax to the year you moved in

if it’s then found you were receiving “rent” even under the rent a room scheme, it’s not going to look good in the eyes of either tax man

for deprecation of assets the council will look back at the money from the house sale, even if it’s several years prior

your mother would most probably be better to put £100k your house, as this isn’t seen as deprecation of assets but at the same time they can’t make you sell - as you live in the house.

then give your brother £10k every year as a present

if it was me I’d sort out the legal with council tax, better than a bill for £15k in 20 years

As I said upthread though I do think I would encourage her to invest proceeds rather than give them away in case this situation did arise. She could make gifts from the profits of her investment if she wanted to.

I think if this situation did arise and we divorced that I would have her live with me. Not sure about what if I died first though!

Also to be honest I fully expect to be her carer at some stage. The women in her family have a history of living a long time and my brother lives away and has a Big Job and I know I would just be the default carer. She did the same for her mum and I’ve just always imagined if she needed care I would be doing as much as I could and that would be easier if we lived in the same building. That is hopefully a long way in the future though but you never know.

Although that is just for a room. If it’s a self contained annex it can’t be considered as part of the scheme.
A room is just that, nothing more so she would have to be sharing the kitchen, for example.