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.

Everyone is saying different things about this, I would obviously need to look into it really carefully

May I also suggest your mother sees her GP for a general health check prior to her passing on any money.
The tax man / local council re care costs have to prove in some way that your mum knew she’d need to pay for her care and deliberately gave her money away to avoid paying the costs herself. If she’s had a GP assessment to show she’s fine then they would find it hard to prove she was deliberately trying to offload her assets when all she’s really doing is giving it to those she lives.

We currently have both my parents across the patio in a self contained annexe.
It is registered separately for council tax at band A because they are dependent relatives.
They have spent some money on upgrading the annex to a standard they are happy with, the rest of the money they have from their house sale is invested in case they need care (approx £250k).
They have also spent money on the overall property upgrading fencing, gates and security which technically adds value but is equally for their benefit.
We have one electric bill but two meters, so they work out their usage and transfer us the money every month to cover it (annexe is electric only)
We have considered IHT and depravation of assets but ring fencing the majority of the money from their house sale demonstrates no intent to avoid care costs, so hopefully all ok 🤞🏻

Thank you for sharing this is certainly something to think about. I would hope it would all be ok, my mum is generally fine with boundaries etc and it would be me helping her out with stuff anyway so it just makes it easier if I’m closer to her. I guess I have always expected to be taking care of her at some point.

she absolutely does not want to be a landlord. It might make sense in some ways for her to contribute to the purchase of the house with half of her share left to me in the future when she dies. I would then have to buy my brother out though which means I’d have to have £50k on hand forever which is probably not realistic. But again that does not enable her to buy another property if anything went wrong as the trust would have dissolved. Alternatively We could leave the money in the trust but I think that can only be done for 3 years before it has to be dissolved. That would give time to see if the arrangement seems to be working out.

It doesn't fall under the rent a room scheme if it's a self contained annexe. Self contained means having its own cooking facilities.

The rent a room scheme is literally a room in your house where they share or don't have access to kitchen facilities.

You can check if the annexe is subject to separate council tax before you buy.

If you buy a property with an annexe you can claim a reduction in stamp duty. Our solicitor had never heard of this but we used a specialist conveyancer and got £6k back.

As I said above it won't be rent a room if it has a kitchen.

Yes I’ve now seen a few things online mentioning cooking facilities. She would have her own kitchenette. So this potentially means that not only can we not use the rent a room scheme, that the annexe should in theory be liable for separate council tax?

It still might be a possibility to have her just pay some bills instead of rent though. Will have to check. Thanks

Thanks I’ve not heard about the stamp duty thing, why is there a reduction available?

It perfectly alright for her to help pay the bills

We also got a partial stamp duty refund because the annexe is a separate building, our solicitor didn’t know either, we actually got a letter in the post (that I thought was a scam!) from a company asking if we knew about it and could they represent us no win no fee. Definitely worth researching!

I can't remember why it is, sorry. Ours is attached to the main house, like an extension, and we got the reduction.

The annexe may not be subject to separate council tax, it depends what the original planning permission says. You can check the original planning on the Planning Portal on the council.website.

Did you bother to read the rest of the thread? I've already linked to the HMRC manual page that addresses when rent a room relief applies to a self contained annex and when it does not

well dont take advice from 'everyone' then. read the HMRC link i posted and take advice from them

Pretty much, yes.

I think your scheme overall is a good one, but why doesn’t she put the money into an investment fund to grow and be drawn on if needed for care. She’d need at least an additional £1200 a month, if not more, for a nice home.

It's called 'multiple dwellings relief' - google stamp duty granny annex loophole tax avoidance or similar but be warned:
You wont qualify for both this and rent a room (you dont get to choose, it is a matter of fact)
HMRC have been cracking down on this recently - lots of people have been falsely claiming the reduction and having to pay it back

Oo
@Turnips857 it seems you and I are being naughty and not reading the whole thread.
Thats told us 🤣

Sorry multiple dwelling relief has been abolished!

You might yet get your claim for multiple dwelling relief looked into and disallowed…. It’s allowed first then checked after.

it really should only be where the annexe is totally separate to the main house and could reasonably be let or sold to an unconnected party and offer them a reasonable degree of privacy and all their own utilities etc.

But anyway it’s been abolished

ah, i didnt know that - good. still cases going through the tribunals though ...😄

some rather misleading replies in this thread

it is NOT certain that rent a room allowance applies since we have not seen the actual set up and therefore whether it meets the criteria set out here:
PIM4004 - Rent-a-room: building divided into separate residences - HMRC internal manual - GOV.UK
"Whether such a division is temporary is a question of fact. You should think about factors such as the following in considering it:

• Would structural alterations be necessary to undo the division?
• How long has the residence been divided?
• How long is the division intended to continue?
• Could possession of the flat be obtained separate from the property as a whole?
• Is the flat separately supplied and metered for mains services?
• Does the flat have its own unique postal address?
• Does it have its own separate entry?
• Would a mortgage lender be prepared to lend on the security of the separate flat?"

If it does meet those criteria the £500 per month rent would be within the RaR allowance meaning no tax payable - but nor can you claim any of the costs as a deduction from that income

If it does not meet those criteria then you are letting to a connected person (relative) at a below market value rate. You would pay tax on your profit: rent received - costs = taxable profit.
However, if costs > rent then under the market value rule you cannot claim a tax loss, your profit would simply be zero, so no tax payable. The basis of the apportionment of any bills would therefore be vital since I doubt the services are independently metered and splitting the council tax bill needs to be done on an accepted formula.

Re deprivation of assets she will have a pot of money from her house sale. She will be changing from ownership to renting, it is therefore reasonable to assume she will need money top pay her rent for the foreseeable future. If her pension and other income covers that al is well, but if she will need to dip into the pot to cover her daily living expenses (food, clothing, entertainment etc etc ) then and money she has given away from that pot would be deprivation. Bear in mind there is no time limit for deprivation, it is an assessment of what she had and what she will need.

You need to look at council tax etc- very common for granny flats to be suddenly charged when they sell.

It may also not be mortgageable

Oh god why would it not be mortgageable?!

because you said
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.

Yes that’s true but it’s part of the main house. It’s all being bought as one unit/house so doesn’t need a separate mortgage?

Is that what the mortgage valuer said?
it doesn’t sound like there is shared access and shared areas?
is it building reg compliant? Have you checked the planning consents ?