Buying property with an annex that my parents will live in

Mrcsmrs

Hubby and I are just about to purchase a property that has a house for us and a smaller cottage that my parents will live in. My parents won’t be paying anything towards buying the property and do not want any interest in it legally. They own their own home which they are thinking about letting out. We are not expecting them to pay any rent, simply to pay a small contribution towards utilities. The annex isn’t currently rated for council tax either and although I understand the sale could trigger a change to this, they are both over 65 so would be considered dependents and therefore exempt. 

The issue comes in that as part of their wanting to move with us, my father wants to pay for a log cabin/summerhouse to be put in for us. I’d guess that this will cost about £10k. They have also mentioned that they would like to add a further bedroom to the annex at some point in the future so that if either of them needs a live in carer , they have the space. They do not want any legal charge on the property or interest in it at all though, so how would this work should either of them need to go into care or die? Would we be leaving ourselves open to a tax liability we haven’t thought about because they’re living rent free with us? I should possibly add that there is only myself, my daughter and my sister who are to inherit anything from their estate and I’d guess at their estate being worth approximately £300k. We genuinely don’t need or want any rent from them because we would have bought the property without them coming with us, but they decided they fancied rural life, so invited themselves along! 

I’d be very appreciative of some thoughts around the legalities of doing this before we get ourselves into a legal tangle we can’t resolve later on! Thank you 😊 

theartfullodger

Is the annex physically attached/part of main building?  Are the two dwellings on separate utility meters (water, gas, electric) and different council tax accounts 

greatcrested

The money they pay towards the log cabin, and the extra annexe bedroom, could well be deemed to be rent in return for the accommodation, making you landlords and liable to declare this money as income to HMRC (plus other LL obligations).

Alternatively, it could be deemded to be a gift, subject to Inheritance Tax rules - either the '7 year' rule or indeed a 'gift with reservation' (since they will be living in the annexe).

It apears to me a grey area requiring input from a lawyer or accountant.

If it is a gift, it could also be considered 'Deprivation of Assets' so far as the local authority is concerned when assessing them for eligibility for funded care.

The only other relevant factor is that they will be making themselves dependant on you. Should the worst happen and you lose the property (repossessed by lender following job loss? Acrimoneous divorce?) they would be homeless.

Mrcsmrs

theartfullodger said:

Is the annex physically attached/part of main building?  It’s a separate building with a small fenced garden area of its own, albeit quite close to the main house. 

Are the two dwellings on separate utility meters (water, gas, electric) and different council tax accounts It doesn’t have any separate meters and isn’t currently rated for Council Tax either. 

Thanks 😊 

2bFrank

As you are paying for the house purchase yourself and not taking rent/ deposit help, then this does make it easier for you.

You will be able to move your parents in, no problems especially from a tax prospective. It is possible, like you mentioned that the annex could be re-evaluated for council tax purposes, but will prob be exempt anyways due to your parents age


Regarding the upgrades, it would be simpler if your parents simply gave you the money as a gift. It is their money and they can do with whatever they want with it. The only issue could be inheritance tax down the road, depending on the elapsed time, you will have to add in this gift into the estate for tax purposes, might also be worth them adjusting their will to acknowledge they have made a gift, but this depends on how well your family get on, and the rare occasion they try and make a case to say you have inherited more unfairly.


Deprivation of assets could be a cause for concern as well if they are gifting you a large chunk of money, however if they are spending that money on an extension for their own care, you could potentially use this as an argument they haven't deprived their asset. The summer cabin could potentially be an issue, if your parents are enjoying this however, then it is again your parents money and they can spend it how they wish.

Mrcsmrs

Thank you. The summer house was my dad’s idea for a thank you for us having them move in, we don’t really need it as such and if we had it I imagine all of us would use it. The extension, again we are happy to pay for that but my dad is of the opinion that he should pay his own way, but I think the gift idea is a good one, thank you. My sister and I are very close, despite her living overseas and she has no worries about our parents’ estate, rather she would feel happier knowing they were with us now that they’ve both just turned 70. 

Hopefully it is all as simple as we’re hoping it is! We’re definitely not moving them in to profit from them in any way, equally they’re super conscious that they want to pay their own way because that’s how they’ve always been! 

Mrcsmrs

greatcrested said:

The money they pay towards the log cabin, and the extra annexe bedroom, could well be deemed to be rent in return for the accommodation, making you landlords and liable to declare this money as income to HMRC (plus other LL obligations).

Alternatively, it could be deemded to be a gift, subject to Inheritance Tax rules - either the '7 year' rule or indeed a 'gift with reservation' (since they will be living in the annexe).

It apears to me a grey area requiring input from a lawyer or accountant.

If it is a gift, it could also be considered 'Deprivation of Assets' so far as the local authority is concerned when assessing them for eligibility for funded care.

The only other relevant factor is that they will be making themselves dependant on you. Should the worst happen and you lose the property (repossessed by lender following job loss? Acrimoneous divorce?) they would be homeless.

Sorry, I missed your post earlier. These are more the things I was concerned about. We genuinely do not want or need to take anything from them, but my dad is of the old school where he wants to pay his way. We definitely do not want to be landlords to them. I’m thinking if he insists perhaps the easiest route will be to make it all an official gift that we may or may not need to pay inheritance tax on. I don’t understand the term ‘gift with reservation’, could you explain please? 

They are both very healthy active 70 year old folk who lead active lives at the moment so I would hope we don’t have to consider a deprivation of assets scenario, and in the event of anything going wrong with our ownership of the property, they could return to their own property or sell that to fund a new home. They wouldn’t be selling their existing home to fund the items my dad is wanting to pay for, and they have a good income via pensions before the rental income on their existing home. My difficulty is more in refusing my dad paying anything because he’s always paid his way, IYSWIM? 

Thank you 😊 

2bFrank

From what you are describing I wouldn't worry about the deprivation of assets, they will be funding an extension onto a home they will be living in and enjoying, the same with the log cabin, they will be taking enjoyment from that and as it is their money they can spend it however they wish.

Deprivation of assets only triggers when they have intentionally reduced their assets to reduce the amount of care they need to pay for. If they are ill, getting ill or getting to a stage where care is looking likely, and they started gifting money, the council, rightly so, will see that as deprivation of assets.

However you describe your parents as active, healthy 70 year olds who wish to spend more time with their children/ grandchild, gifting money so that they can move into the annex of their child's property and help with care later, should not trigger this. The guidelines are also very clear about this, 

"People should be treated with dignity and respect and be able to spend the money they have saved as they wish – it is their money after all.…[but] it is important that people pay the contribution to their care costs that they are responsible for. This is key to the overall affordability of the care and support system. A local authority should therefore ensure that people are not rewarded for trying to avoid paying their assessed contribution." 

Mgman1965

Make sure you read the info on here about becoming a LL (along with all the legal obligations) as that is what your parents will become if they let their old home out, as it's really not for the feint hearted or the elderly really.

Also don't forget should the worst happen (divorce, repossession) it can take up to a year and a lot of expense to get difficult tenants out.

And don't forget, even the best, easiest going relationships (partners AND families) can break down acrimoniously. 

coachman12

Hello Mrcsmrs, Sounds a nice family idea and one that is a lot more common than people realise----
quite a few "Granny flats", converted outbuildings ( such as coach houses, stables, etc) can be found on the market and much sought after. 
You say that you and hubby are "just about " to buy the property in question-----that probably means you have already instructed a solicitor : if so, you can chat about the additional matters raised in your post with him/her. It will prove much easier than you think.
The artfullodger's questions about whether the buildings are physically separated is relevant. 
As for the gift of a summerhouse, I am no solicitor and have such things done by professionals whether solicitors, accountants, financial advisers, tax advisers, etc, but I've had plenty of outbuilding conversions and moved money around as gifts often enough; and I take the simplistic view there will be no tax on £10,000  (your mother's annual allocation and your father's allocation given to you and your husband separately).
In any case, I don't think there should be any problem if the summerhouse aspect is dealt with by adding a legal contract/agreement  between you and your parents.
Your new home sounds nice, out in the countryside, and I wish you and your parents a long, healthy and happy time there.

greatcrested

A 'gift with reservation' is a gift where the donor retains some aspect of it.

A more clearcut example would be where a parent gifts a property to their child (ie transfers ownership into the child's name) but continues to live in the property with the child's consent perhaps till death.

The 'reservation' in the gift is that the child does not get to use the gift (property) till much later.

In such a case, the value of the gift (property) would still be included in the parent's Estate on their death for Inheritance Tax purposes.

This is obviously to prevent all elderly people transfering all their assets to their children before death and thus avoiding IHT!