Should We Build a Granny Annexe?
My mail box had the following question in it regarding a “granny annexe” and I thought the answer would be of interest.
The question was on behalf a friend, “The father, late 80s, with Alzheimer’s Disease has recently lost his wife. The family is considering the possibility of the father selling his house and using some of the money to build a granny annexe onto the home of one of the children.
As the father is effectively simply downsizing and the money being spent on his own ‘home’:
- Would that be considered deprivation at all if he were to die within 7 years?
- How does ‘paying rent at the market rate’ come into it?
- Is deprivation relevant to anything if someone is self funding?
The rules seem very complicated, so if anyone has experience of this, advice and warnings would be greatly appreciated”.
Deliberate Deprivation & Inheritance Tax
This is a very interesting and pertinent question, because it raises a number of issues, moral, practical and legal. The 7-year rule is to do with Inheritance Tax and not Deliberate Deprivation. With the latter, there is no specific time-frame and each case is judged on its merits. If entry to care, with Local Authority funding, occurs shortly after a financial transaction, there is a prima facie case that it was Deliberate Deprivation, but the onus of proof of deliberate deprivation is on the Local Authority.
Is the contemplated transaction Deliberate Deprivation? I think not. If the Family doesn’t offer to care for Father, then he may finish-up in residential care and become a financial burden on the Local Authority. By selling his home, investing in a “granny annexe” and being cared for by the Family, he is potentially saving the Local Authority money. Deliberate Deprivation is all about dastardly schemes to shelter your assets, not trying to maintain your independent existence.
My view is that the legal issues should be dealt with by way of the ownership of the altered home. Value the property today, without the annexe, add the cost of building the annexe and then split the ownership accordingly. So, if the property is worth £150,000 today and the cost of building the annexe is £50,000, the Family retains 75% and Father has 25%. The property might then be worth £220,000, so everyone wins.
There are no Capital Gains Tax issues, because the property will still be occupied by the owners as their Principal Private Residence. The future inheritance of the other children is protected, because there is still a valuable asset (although their inheritance may have to be deferred until the property is sold, unless there are sufficient other assets to balance out the shares without selling).
Rent isn’t an issue, because Father would be living in his own property. It would be appropriate, however, for outgoings to be apportioned – Council Tax, Utilities, etc – and, if meals are to be provided by the Family, then a contribution to housekeeping should also be made, so Father pays his way. Otherwise, the Family could be subsidising either the Local Authority, if funded care is needed in the future, or the other beneficiaries under Father’s Will.
At the time of answering this question, I stated that, if Father subsequently goes into care, and needed Local Authority funding, then the value of his share of the property should be deemed to be nil by virtue of Clause 7.019 of the CRAG (Charges for Residential Accommodation Guide), because, the annexe isn’t saleable independently of the remainder of the property. Unfortunately, the CRAG has since been withdrawn in favour of the Statutory Guidance under the Care Act 2014, which is much more ambiguous regarding such property matters. However, I’m keeping my copy of the CRAG to argue with Councils how they should exercise their discretion in similar situations!
Finally, as the question implies, Deliberate Deprivation isn’t an issue for a self-funder, it only becomes an issue once an application is made for Local Authority funding.
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