Tax implications of building a 'granny annex'

[bella9257]

Hi

We are considering building an 'annexe'to our property to provide accomodation for our elderly parents.

The scheme is to be funded from the sale of our parents property in the following ways.

1. Building Costs approx 45k

2. Lump sum (approx 40k)to be gifted to us to contribute to reducing our currently high mortgage and therefore reducing the risk to us in terms of repayments.

Please could you advise as to what tax implications we and our parents may face, and reccommend the legal channel we should approach.

Thankyou

[Andy Wood.]

Bella,

This is an interesting one, and one which you really should consider seeking advice on. Here are my quick thoughtsÂ….

The main issues will surround whether IHT and / or the new pre-owned asset charge (PoAT) apply.

From an IHT perspective, the gift of the funds is likely to be a Potentially Exempt Transfer (PET) and will fall out of their estate after 7 years (subject to gift with reservation rules GWR – see below) Will

An issue is whether the gift (applied to the building costs) falls within the GWR rules. Broadly they apply where the donor continues to derive a benefit from the gift. However, GWR rules do not have cash tracing provisions (unlike PoAT) so whether the cash gift and construction of annex can be linked is arguable. There are other rules (called ‘associated operations’) which could potentially link the two. Again, facts of the case are important.

PoAT are new rules applying an income tax charge on the continued enjoyment from previously gifted assets and were intended to plug holes in the GWR regime.

My thinking is that this would not fall within PoAT rules as the cash has not been used to purchase an interest in the property. However, this is by no means certain.

That said, both IHT and PoAT would be assessable on your parents.

Need to look at this one with all the facts. So, again, seek some advice.)

Hope this helps (sorry a bit long-winded!)
Cheers

Andy Wood
Chartered Tax Adviser

awood@clbcoopers.co.uk
01204 551124