Are you considering the idea of moving into a granny annexe to benefit both you and your adult children? While such living arrangements can be mutually advantageous, it’s crucial to understand the potential tax implications, specifically in relation to Inheritance Tax. Ives & Co, a leading solicitor in Nottingham, can assist you with wills, trusts, and probate.
In this scenario, the common arrangement involves a parent selling their property and gifting the funds to their adult child. The child then either purchases a new property with a granny annexe or extends their existing home to accommodate the parent. This arrangement, however, may trigger tax considerations.
One aspect to consider is the potential classification by HMRC as a Gift with a Reservation Of Benefit or GROB. The determination hinges on the specific facts of each case and how the transaction is funded. If treated as a GROB, it may have implications for Inheritance Tax.
Alternatively, the arrangement might fall under the purview of Pre-Owned Asset Tax or POAT, an anti-avoidance legislation introduced in 2004. POAT applies when the donor (parent) provides funds for property purchase and continues to benefit from the property. This annual Income Tax charge is based on the open market rent achievable if the property were commercially let.
To avoid falling under GROB or POAT, the parent can choose to pay the full market rent if financially viable. This approach would exclude the arrangement from these tax considerations. Alternatively, the parent may retain an interest in the property, such as a share in the equity, typically outlined in a Declaration of Trust.
The complexities of POAT extend beyond property, covering chattels and intangible assets. Seeking specific and specialist advice is crucial when navigating this intricate area of tax law.
Despite being flagged as “complex and not widely known about or well understood” by the Office of Tax Simplification in 2018, the POAT legislation is yet to undergo a government review.
In conclusion, if you retain any benefit from an asset you’ve given away without paying market rent, there may be tax implications, either as an Inheritance Tax liability (GROB) or an Income Tax charge under POAT. To ensure you make informed decisions aligned with your financial goals, seeking appropriate legal and financial advice is paramount.
