Funding Annexe as an Investment - Does This Make Sense?

DairyQueen

I am considering funding an annexe at my parents' property to house my brother. He has been reliant on family members housing him since he suffered an expensive divorce several years ago. He was left with huge debts and no means of funding a home. For the last year he has been living with my elderly parents but that is no longer tenable. We have investigated various alternatives but independently renting/buying is beyond his means and there are no other family members able to accommodate him. He works full time and his job is not foreseen to be at risk.

Parents are unwilling to extend their home but may be prepared to allow an annexe to be built in their garden to house my bro. Problem being that they do not have the means to fund such an enterprise. I do. However, I would very much appreciate the MSE community's input on issues which I should consider before proceeding.

The situation under consideration:
1) I will own a proportion of my parents home (via a declaration of trust) equivalent to the amount I invest to install the annexe. This would be repayable either on the sale of the property, or on the death of the survivor of my parents. I assume that I will be repaid before their estate is divided under the terms of their will.
2) I will receive 10% return on the investment by means of rent paid to me by my brother. He will pay my parents an amount for utilities and council tax. The high rate of return is intended to compensate me for the illiquid nature of the investment as it's possible that my capital will be tied-up for a decade (or longer). The rental amount is insufficient to affect my income tax status but I am unclear what the possible CGT could be.
3) Brother would be responsible for the maintenance cost of the annexe and would need to legally contract to continue to pay the rent due until my investment was returned to me under the terms of 1) above. My parents do not need the annexe for their own use and we do not foresee any other use for it other than to house my brother.
4) The annexe would be classified as a 'mobile home' so would not be subject to planning consent (the house is not listed or in a conversation area).
5) I am unclear what would happen if one/both my parents needed to nursing care. My bro is 60 next year and if the house had to be sold he would be homeless. This applies regardless of whether he is living in an annexe or in the main house. Would my investment be deducted from the house value if the house was included for care fees? What would happen to my bro in that situation?
6) My brother will be responsible for the council tax due on the annexe (as it will be considered a separate residence for council tax purposes). I believe that it will be categorised as 'group A' and he will be entitled to a 25% singe person discount, plus an additional 50% discount on the balance (as he is the son of the occupants of the main house).
7) I intend changing my will such that if I predecease one/both parents then the declaration of trust will be void on my death and they will effectively inherit the investment from me. Such a move would not impose an additional IHT burden on their estate.

Are there any other issues which I should be considering? Does this seem like a cost effective way to ensure my brother is housed whilst providing me with a reasonable return on the capital? This seems to be the best option available to resolve his housing problem but there may be others which I have missed.

Your ideas and opinions are most gratefully received. Thanks in advance.

masonic

I can see some issues in placing your brother into a legally binding contract for the rent that can only be terminated by events he cannot control. One cannot discount the possibility that his own health could deteriorate such that he needed nursing care while one or both parents lived on in the property, for example.

You've not mentioned what proportion of your assets you would be investing in this annex, and what other investments you hold, which would speak to the level of risk you are taking on. Presumably the 10% return you will be getting in the form of rent is still well below market rent for a comparable property?

In terms of CGT - that will come into play when the property is sold.

DairyQueen

masonic wrote: »

I can see some issues in placing your brother into a legally binding contract for the rent that can only be terminated by events he cannot control. One cannot discount the possibility that his own health could deteriorate such that he needed nursing care while one or both parents lived on in the property, for example.

You've not mentioned what proportion of your assets you would be investing in this annex, and what other investments you hold, which would speak to the level of risk you are taking on. Presumably the 10% return you will be getting in the form of rent is still well below market rent for a comparable property?

In terms of CGT - that will come into play when the property is sold.

Thank you for your reply. I hadn't consider the possibility that bro would need nursing care (thank you for that prompt). First thought is that I won't be able to provide safeguards against all possibilities so I will try and focus on those most likely. My biggest concern is that bro decides (for whatever reason) to move out leaving me/parents in the lurch. I don't want to impose on his freedom to do so but, given the investment we would be making to safeguard his housing situation, I don't think it unreasonable that he assumes the commitment of recompensing parents/me in the event that he moves from choice. Although not something I foresee happening in the short term, I believe it is more likely that he could move out voluntarily rather than predecease our parents, or need nursing care in their lifetime. In the latter circumstances I would accept the loss of income.

I should mention that he lived with me for 5 years before moving in with our parents last year. Both situations were expected to be temporary but it has become evident that he has no other option other than to live with a family member..

The plan is that I invest £30k and my parents contribute the balance of the cost of the annexe (approx £10k). Bro will pay me £250 per month. In our area a room in a shared house rents at approx £350 per month (plus bills). A one bed place at £480+ and a bed sitter £420+. The annexe would be a very good rental deal for bro.

Husband and and I are late 50s. Mortgage paid off. Pensions sorted (mix of DC/DB/SIPPs) - he is almost at lifetime limit and is still working. My only income is from investments so I only add minimally to my pension each year (gross £3600) plus I will make voluntary NI contributions for the next 5 years to max out state pension. We also have some direct shareholdings (mostly in ISAs). Cash reserves currently £120k so the annexe investment represents 25% of that figure, plus pension contributions for me will require another £15k-ish over the next 5 years.

Husband's job isn't that secure but, if push comes to shove, we could use cash surplus and DC/SIPP pension funds to tide us over until DB pension age.

Given that husband and I are reasonably secure financially this investment seems like the right thing to do in order to help provide a permanent solution to a difficult family situation whilst safeguarding our money.

I'm definitely open to any other housing propositions for bro but I think I've researched/exhausted every possibility: he can't get a mortgage, he can't afford to rent anywhere other than in a shared house (tough for someone pushing 60), he isn't eligible for social housing, there are no other family members he could live with.

fwor

DairyQueen wrote: »

4) The annexe would be classified as a 'mobile home' so would not be subject to planning consent (the house is not listed or in a conversation area).

If you have not already done so, check that the land that the property is on is not subject to any restrictive covenants that might forbid this. My property is subject to one that forbids me building a shed in the garden...

Thrugelmir

DairyQueen wrote: »

Parents are unwilling to extend their home but may be prepared to allow an annexe to be built in their garden

Cost of build may not add the same value to the property overall. Annexe could also restrict number of buyers when time to resell.

DairyQueen

fwor wrote: »

If you have not already done so, check that the land that the property is on is not subject to any restrictive covenants that might forbid this. My property is subject to one that forbids me building a shed in the garden...

Good point. Thanks for that. I will ask parents to check their deeds.

DairyQueen

Thrugelmir wrote: »

Cost of build may not add the same value to the property overall. Annexe could also restrict number of buyers when time to resell.

I think you are spot-on. The cost of the annexe won't be recouped by a proportionate increase in the value of the property. it may also deter some buyers, but it may attract others who are specifically seeking a multi-generational property. I think the options for bro are so limited that, short of a show-stopper issue (like a covenant on the land), this is pretty much the best we can do.

G_M

1) Capital Gains tax. You will own a property that's not your main residence

2) supplementary SDLT if you already own a property yourself. This will be your 2nd property.

3) Planning constraints: a) will PP be granted? b) will the annexe bw self-contained & if so will Planners permit this

4) possible requirement for seperate Council Tax

5) future issues resultig from joint ownership - what if parents want/need to sell? Need to move to Care Home? What if you need your equity back? What if the rent is not forthcoming?

6) will brother be a tenant? Do you understand the legal implications? Or will he be a lodger? Do you know the difference?

7) Income tax. You will be receiving rent so will need to declare it to HMRC

8) what if brother fails to maintin the proprty?

That's the top of my head!

edit:

4) The annexe would be classified as a 'mobile home' so would not be subject to planning consent (the house is not listed or in a conversation area).

I very much doubt this:

http://www.selfbuildtimberframe.com/planning

DairyQueen

G_M wrote: »

1) Capital Gains tax. You will own a property that's not your main residence

Exactly. See above. Possibility of CGT liability is a consideration.

G_M wrote: »

2) supplementary SDLT if you already own a property yourself. This will be your 2nd property.

Not applicable as I will be loaning my parents the money and the loan will be secured via the property. Ownership will remain with my parents.

G_M wrote: »

3) Planning constraints: a) will PP be granted? b) will the annexe bw self-contained & if so will Planners permit this

PP not needed as type of annexe under consideration is defined as a 'mobile home' under planning law, will be occupied by a family member, will not have a separate address, will share the services of the main property. House is not listed and is not in a conservation area.. The rules are very specific but many such annexes are designed to resemble chalets and look nothing like large touring caravans. Annexe is self-contained but is not a separate dwelling except for council tax purposes. I have spoken to the planning department and this annexe will meet all rules. It does not require PP. Most people don't realise that anything defined as a 'mobile home' can be sited in a private garden without PP providing it meets the definition (size, mobility, height, etc.) laid down in planning law. There are many imaginative designs out there.

G_M wrote: »

4) possible requirement for seperate Council Tax

Mentioned above. Not onerous under our circumstances.

G_M wrote: »

5) future issues resultig from joint ownership - what if parents want/need to sell? Need to move to Care Home? What if you need your equity back? What if the rent is not forthcoming?

Mentioned above.

G_M wrote: »

6) will brother be a tenant? Do you understand the legal implications? Or will he be a lodger? Do you know the difference?

Neither. He is a member of the family. He will pay my parents a contribution toward household expenses (utilities and such). Parents will pay me for the loan.

G_M wrote: »

7) Income tax. You will be receiving rent so will need to declare it to HMRC

Not rent, investment income. It's also not enough to exceed my personal allowance. See above.

G_M wrote: »

8) what if brother fails to maintin the proprty?

That's a risk I will have to take but it's a good point.

Thank you for taking the time to reply.