How best to get tax-efficient rental income from a 'Granny Annexe' to help fund care costs?

MoneySavingAndy

Hi All,

I am trying to plan how to fund care for my elderly mother in the future, and although I think I am going to need professional advice, I just thought I’d see if anyone could give me any pointers, please?

My mother currently lives in a self-contained, one-bedroom ‘barn’ (we call it the ‘Granny Annexe’ or ‘Grannexe’) that is on the same plot of land as my sister’s house, owned by my sister and brother-in-law as part of the same overall property (it was bought as a single purchase, has one postal address and both buildings are treated as a single property for council tax purposes).

We envisage a time when our mother may need to move into accommodation that provides a greater level of care, and one way to contribute towards the cost of this care is by letting the separate building that she currently lives in. It’s a nice little place with a very decent kitchen and living room as well as the bedroom on the floor above, with parking and garden access, so it’s rental value is potentially around £1,000, or perhaps a little more, per month.

As mentioned above, my sister (and her husband) own the Grannexe as part of their home, so any rental income would presumably be counted as theirs (or could it be counted as my mother’s even though she does not own the asset?) Both of them are higher-rate tax payers. In the future, when my mother no longer needs care to be funded (to put it subtly), it may be that my sister and I decide to continue letting the property indefinitely and take the proceeds between us (as its refurbishment was funded by our mother). I am also a higher-rate tax payer.

Our principal short term objective is to maximise the proceeds from rental that we can then use to help fund our mother’s care for however many years that may be necessary, although we also have an eye on the longer-term rental income possibility that we would share. I've noted some thoughts and questions below...

• What are the taxation implications of letting the Grannexe, and what would be the most tax-efficient way to do this?
• Would my sister and brother-in-law, as overall property owners, simply have to claim the £7,500 ‘rent-a-room’ tax allowance and accept a higher-rate tax charge on the additional (gross) income of £5k or so (which would be about £2k under current rates)?
• Or could it be let in such a way that my mother (a basic-rate tax payer) takes the income (also still claiming the rent-a-room allowance if she can)?
• How else could we reduce tax liability to provide more money for care?
• Are there any other allowances we could use, e.g. for wear and tear, whilst letting the property?
• Would operating some kind of limited company structure, perhaps jointly with me as we look to the future, provide a more tax efficient way of doing it somehow, or would the costs and hassle of doing that simply not be worth it with a tax bill that is only likely to be in the region of £2k or so?

Thanks for reading the long posting, but I wanted to provide full details – appreciate we will probably need professional advice, but I also like to try and do my own research so any pointers would be gratefully received!

Andy.

TripleH

Air BnB or holiday cottage?

My parents had a self contained building on their land they used for holiday lettings.

If you setup a limited company with your mother owning 2 shares (to pass on down to you) then any income generated would only impact your personal tax when you take it out the company.

Your mum doesn't need to own the annex either.

But talk to an accountant to get it setup correctly and agree how it will operate with all involved.

It may not be the most efficient way, but as you don't need to get a separate meter etc it can work with minimal setup costs.

km1500

Since the barn is part of the overall property you can use the rent-a-room scheme, the first £7500 of rent being tax free.

https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

sidneyvic

The property belongs to your sister and it her responsibility both tax wise and what to do with the income, you have zero entitlement to anything.

MoneySavingAndy

TripleH said:

Air BnB or holiday cottage?

Hi, thanks for the quick reply. I guess we could do either - I hadn't thought about that - in my mind we would actually just let it to one person/couple under a tenancy agreement for however long required (e.g. six months or more). Other than the potential difference in income generated versus the level of hassle to manage and maintain, do you see any other tax-related implications we should consider?

lookstraightahead

When did your mum move in with your sister and did she give your sister any money to help buy the property, or did she move there later? 

km1500

If you let it to a person or couple under a tenancy agreement then you are effectively splitting the property and the barn will probably become liable to its own council tax

if you let it under rent a room then you are effectively letting to lodgers and you get the tax advantages and also of course the ability to ask them to leave.

theartfullodger

Is the "barn" attached or part-of the main property please?? If no, then it's an AST (pretty much regardless of what the paperwork says), if yes, cannot be an AST.

MoneySavingAndy

sidneyvic said:

The property belongs to your sister and it her responsibility both tax wise and what to do with the income, you have zero entitlement to anything.

Hi sidneyvic, thanks for your reply, although please forgive me if this is a little blunt: I made no mention of, and did not intend to imply anything about, any 'entitlement' on my part. I am fully aware that the property belongs to my sister and her husband and that I have no legal rights to anything, but we work closely together and I help my mother with her finances, and we are now looking to the future to ensure that we can provide for any care that may become necessary.

My first priority is my mother and her care costs and therefore minimising tax to give us as much income as possible to spend on care and accommodation. (And yes, preserving capital in her other investments and savings for any potential future inheritance is another part of that, outside of this property question.)

Secondary to funding for care care, and looking to the longer term, my sister and I recognise that the property she lives in is one that she paid to extend and refurbish (although it is owned by my sister), and we may decide to set up an arrangement in the future whereby any proceeds from letting it out are shared in some way between us. But that is through mutual trust and agreement, not legal entitlement. Hope that helps to clarify.

lincroft1710

If this annex is self contained (i;e; has its own kitchen and bath or shower room) then it should have its own Council Tax banding (under current rules your mother would be exempt from paying CT) and I don't think it would qualify for the Rent a Room scheme, as it isn't a room but effectively a self contained bungalow or flat

MoneySavingAndy

lookstraightahead said:

When did your mum move in with your sister and did she give your sister any money to help buy the property, or did she move there later? 

Hi lookstraightahead, thanks for your response. My mother did give my sister some money to buy the overall property (and a similar amount to me as it happens, just to treat us equally), plus she paid for the refurbishment work on the Grannexe from some of the money raised by selling her house (keeping the balance invested for herself). How does that impact things now; that seems like history and not relevant as it was some years ago?