The "Granny Annexe" - matters to consider

The costs of paying for residential care in later life, and the impact on their estate, are quite understandably of concern to many of our clients.  Many people decide to sell their home and move in with relatives, hoping that their family will be able to look after them and avoid the need for residential care.  This might involve adapting or extending a home to create a “granny annexe”.  

Although there are many benefits to this arrangement (for example reduced isolation, shared accommodation costs, access to basic care) both parties should consider the legal implications before making the move and incurring the associated costs. They will then be able to make an informed decision about whether this is the right arrangement for them. 

Protect your capital interest

If you are considering giving financial assistance to your family to build or adapt their home, but are not making a gift of the funds, you should protect your beneficial interest in their property by entering into a Declaration of Trust. You would become tenants in common with the property owners and the Declaration of Trust will clarify the terms on which you are contributing the money and under what circumstances it will be valued and repaid.  Repayment might arise if residential care is needed after all, the arrangement just doesn’t work out as hoped or on your death (if your estate is to be shared with other family members).

Set out living arrangements

An open and honest conversation about the new living arrangements is strongly recommended before you move in and also periodically afterwards.  Ideally you would all discuss and agree on issues such as contributions towards expenses, chores, acceptable levels of behaviour and what level of privacy should be afforded to all occupants.  This will help to prevent tensions that might otherwise arise.  Decisions reached can be recorded in a simple Cohabitation Agreement.

Care Fees and Tax Implications

Care fees are rising in the UK and local authorities will look at a person’s assets to determine eligibility for financial assistance. Currently, a person’s assets will need to be below £23,250 before financial support is offered. As the cost of residential care can be in the region of £30,000 to £50,000 per year (with nursing care costing significantly more), providing care within the family home can be far more cost effective than residential care.

If you have invested funds in your family’s home, your capital may need to be withdrawn if your health deteriorates to the point where you have to go into a care home.

If you gifted the money to your family and later require residential care, there is a possibility that the local authority could assess you as still owning the gifted funds (even though you don’t) if it considers that the main motive for making the gift was to try and put yourself in a better position to claim state assistance with your care costs.  There may also be Inheritance Tax implications to the gift that need to be considered.

Both of the above scenarios could lead to the home having to be sold if your family cannot afford to buy your interest out at market value.

Write or update your Will

It is advisable to make or update your Will to reflect your new situation and to consider how best to distribute your estate amongst your family. 

Other considerations

What if a family member gets divorced after you have contributed or gifted them money to adapt their home? The divorcing spouse may be entitled to part of the gifted funds.

What will you do if your family member dies?  You may need to find alternative accommodation if their spouse doesn’t wish to share their home with you any more.

A trial period of living together might be advisable before committing to the arrangement. 

If you would like more advice on the issues raised in this article or a document drafted to protect your interest in a family member’s property, please speak to a member of the firm’s Private Client team.