08 Jul 2019

Taxation Readers’ Forum: annexation

Insights, Publications

Writing for Taxation magazine’s Readers’ Forum, BKL tax adviser Terry Jordan answers a reader’s query about elderly parents providing funds for a granny annexe.

‘My clients’ house has a large garden, and they think planning permission could be obtained for another property.

Although they do not need medical or nursing care, the husband’s elderly parents need assistance and have suggested that they sell their house and use the funds to build a self-contained ‘granny annexe’ in the garden. The clients have asked for tax advice and I should be grateful for readers’ thoughts.

Could some main residence relief be lost and what about aspects such as the pre-owned assets tax and gifts with reservation of benefit? Is there any easy way of implementing this plan?

I would be grateful for general advice here.’ Query 19,390– Gramps.

Reply by Terry ‘Lacuna’ Jordan, BKL

No requirement for the reservation of benefit or pre-owned assets liabilities.

‘Gramps’s query relates to his client’s elderly parents and the provision of accommodation for them in future. Under the headline ‘Hunt to reward you for taking in granny’, The Times of 5 July reported: ‘Jeremy Hunt promised tax breaks for “granny flats” last night as part of his solution to the social care crisis’, but no further details are available at the time of writing.

We are not told the financial figures involved nor the size of the clients’ garden. It might be that, by 6 April 2020, the parents could have a total of £1m to leave free of inheritance tax if they own a residence. If they acquire land from their son and his wife and build a property for them to own, the son and his wife would need to consider whether any gain on their disposal would be exempt from capital gains tax under TCGA 1992, s 222 et seq. Those provisions would, on the face of it, apply to the parents’ house on a future disposal.

One of the reasons for the introduction in FA 2004, with effect from 6 April 2005, of the income tax charge on pre-owned assets was the fact that, as a general proposition, the inheritance tax gifts with reservation of benefit provisions in FA 1986 s 102 and Sch 20 do not trace through an outright gift of cash.

If it really is to be an annexe rather than a separate property and the parents make gifts to the son and his wife, the circumstances may be similar to those of Mrs Clarke in Example 3 of the writer’s Tolley’s Tax Digest, issue 33 ‘A Practical Guide to Pre-owned Assets Tax’:

‘Mrs Clarke has sold her house and has moved into accommodation that forms part of a property owned by her daughter and son-in-law. She is spending £200,000 on improvements to that part of the property. Mrs Clarke is outside the scope of the income tax charge. She has never owned an interest in the “relevant land” or any other property, the disposal proceeds of which were used to acquire the relevant land¸ so that the disposal condition in FA 2004, Sch 15 para 3(2) is not met. Similarly, as Mrs Clarke has not provided any of the consideration given by her daughter and son-in-law for their acquisition of the relevant land the contribution condition in para 3(3) is not met either. HMRC Capital Taxes have recently confirmed in similar circumstances that the charge does
not apply.’

To conclude, there should be no need for the inheritance tax gifts with reservation of benefit or the pre-owned assets tax provisions to be in point here although the right solution will be fact-dependent.

The planning is likely to be more complicated if the son is not the parents’ only child.’

The article is also available on the Taxation website.

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