Building a granny flat? Sort out the finances first
Thanks to rising property prices and costly care home fees, a growing number of families are choosing to live with older relatives.
Figures from the Valuation Office Agency show that there are more than 30,000 granny annexes in England in Wales – an increase of 39% in just two years. “A granny annexe can offer a useful bridge between independence and the provision of care,” says Martin Bamford, a chartered financial planner at adviser Informed Choice. “It can be a lot more cost-efficient than providing care either in a separate home or residential care home.”
In the past few years, the government has taken steps to encourage families to live together and has reduced social care costs for the taxpayer by discounting council tax and scrapping stamp duty increases on annexes.
But how do families make it work? And with so much money at stake, how can you decide if this is the right option for everyone? Moneywise takes a look.
How does it work?
Rather than moving a relative into the spare room in your home, setting up an annexe is more complex. Most often, both parties chip in cash to build the annexe. But how you share ownership of the property has financial – and legal – implications.
A ‘joint tenancy’ is where the property is owned in equal shares and if one ‘tenant’ dies, their share is automatically divided equally between the other owners.
In contrast, owning as ‘tenants in common’ means that while each party has a fixed share of the property, the shares may not always be equal and if one of the owners dies, their share will be inherited by their named beneficiary.
It may seem obvious to buy the property as tenants in common, particularly if you have invested different amounts of money.
However, it is vital to consider who would inherit any shares and how this could affect your living arrangements.
To further complicate matters, if a mortgage is needed to buy the property – or even to buy just a share – securing a home loan could prove challenging. Typically, lenders are unwilling to provide a mortgage to buy part of a property. This is because, should you default on your payments, they will be unable to recoup their costs as they cannot repossess and sell a home if someone else owns the rest.
Putting all owners on the mortgage is not an easy alternative either, as many lenders are reluctant to give mortgages to people past retirement age. Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “Lenders routinely ask for details of the dependants living in a property.
“If one generation does not contribute financially, then the lender could make assumptions about how their lifestyle is afforded – for instance, the non-earning dependant becomes a financial drain on the others, which will affect the amount you can borrow.”
What is more, explains Mr Harris, some lenders do not like annexes with a separate entry and no access to the main house because of the risk of it being let out.
What are the benefits?
Despite these obstacles, there are obvious advantages to setting up an annexe – and many of them are financial – says Patrick Connolly, certified financial planner at adviser Chase de Vere.
“Sharing a home in this way can lead to the family as a collective living in a nicer house and having more disposable income, which can be used to pay off existing mortgages, for school fees or university costs or for better standards of living generally and more luxuries such as foreign holidays,” he says.
This approach is ideal for combating the high costs of childcare, and care for the elderly, particularly if family members have health problems. “From a societal perspective, an increase in the number of multigenerational homes should also mean that people are less reliant on the state, because they’re looking after their own relatives, which means that taxpayers generally could end up paying less,” says Mr Connolly.
However, should the health of the elderly relative deteriorate and they need round-the-clock care, local authorities will look at the person’s assets to determine eligibility for financial assistance.
Under current rules, assets need to be below £23,250 in England and Northern Ireland (£26,250 in Scotland and £24,000 in Wales) before support will be offered. If they still own property, or even part of it, this will be included in the funding assessment.
However, there are situations where your property must be disregarded, should a spouse or another relative over the age of 60 live there, for instance. Local authorities also have further discretion to disregard the property in other circumstances where a relative under this age lives in the home, but it does not have to exercise this power. To find out more, check out Age UK’s Guide to Paying for Permanent Care at: Age UK.
What are the pitfalls?
While it can make financial sense to set up a multi-generational household, living arrangements such as this can cause family disputes. There might also be legal or tax planning considerations, particularly if properties or other assets are bought by more than one person. It may, therefore, be sensible to take the advice of a solicitor or independent
“The inheritance tax position will depend on how the unit is purchased or funded, and the legal ownership of the annexe,” says Mr Bamford.
“If the older member of the family is gifting money from the sale of their main residence, then the seven-year rule will apply before that gift becomes exempt for inheritance tax purposes. To avoid the property being treated as a gift, a market rent should be paid.”
Another common issue faced by families in this situation involves property ownership. For instance, if one generation owns the property, it will have control over whether the property is sold in the future and other generations may feel that they have less of a say in household matters.
On the other hand, if family members own shares in the property there are potential problems if somebody wants to sell up and move to a different property, and the others don’t want to sell.
To further complicate matters, there may also be problems if there are any family breakdowns. If somebody moves out of the home because of a relationship breakdown, they may demand their share of the property or claim a share through divorce proceedings.
Four tips to make it work
When it comes to sharing the roof over your head with another party, it is essential to get professional advice to avoid both short-term and long-term create a financial association with the other account holders on your credit file. If you are linked to someone with a poor credit score – or even no credit record – lenders may turn down any future applications.
1. Set boundaries
Before you start moving your elderly relative in, it is essential to have an open and honest discussion about how the living situation will work. For instance, who will do the chores, how household bills will be paid, what element of privacy will be afforded and what type of behaviour is acceptable.
“When groups of people are living together there will always be tensions that arise, even if that is just over minor details such as queuing for the bathroom in the morning,” says Mr Connolly. “However, to stop these tensions from escalating it is sensible to have a means of addressing them; perhaps through a regular family meeting where any grievances can be aired.”
2. Sort out the cash
You need to consider how this living arrangement will work financially. For instance, how much will each party invest in the sale price of the property, but also, who will be responsible for major repairs and garden upkeep. It makes sense to get this agreement in writing so that there will be no disputes in the future.
A joint account for paying out rent and bills in a shared house can seem convenient, but the risks might outweigh the advantages – so steer clear. Should you open an account with someone, for example, you will
3. Consider changing needs
One of the biggest advantages to multi-generational living is that family members are on hand to help one another – whether it is by providing childcare or looking after an aging parent.
But you need to think carefully about how everyone’s needs may change. For instance, will the house still be practical if the older generation becomes unable to climb a flight of stairs?
How will the location suit if one of you becomes unable to drive? It also makes sense to consider future caring responsibilities – in other words, when would it be sensible to consider long-term care – to avoid anyone suffering undue stress.
4. Don’t overlook other legal aspects
When buying with relatives, getting your will written or revised is a nobrainer, but few will consider what would happen if they were unable to make decisions due to short-term issues such as an accident or a longterm problem such as dementia.
All owners of the property should apply for a Lasting Power of Attorney (LPA) to ensure that all financial obligations can be met should their health change.
This legal document allows you to appoint one or more people as an ‘attorney’ to make decisions on your behalf should you be unable to do so. Find out more at the Office of the Public Guardian or read How to set up a Lasting Power of Attorney... while you can.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Lasting power of attorney
Refers to the legal document which allows an individual (donor) to nominate a person or people (attorneys) to make decisions on his or her behalf should they reach a state where they no longer have the mental capacity to make certain decisions. LPA can be divided into two groups: the donor’s financial wellbeing and their health and general welfare. You can choose anyone you trust to act as your attorney provided they are over 18 and not bankrupt when they sign the form and you can appoint more than one person to act and can choose whether they can act together or independently. An LPA is a powerful and important legal document and you may wish to seek advice from a legal adviser with experience of preparing them.