One of the most frequently asked questions when it comes to considering the overall cost of building a granny annexe in your back garden is concerning the cost of potential Granny Annexe Council Tax. Here is the answer.
Our best advice is to double check with your particular Local Planning Authority once the granny annexe is built.
But in general circumstances, wherever you live in the UK following guidelines are a great place to start.
Granny Annexes Council Tax
As with any potential new revenue stream for the Government, Granny Annexe Council Tax was introduced quite quickly as the number of annexes started to increase. However, as the large majority of granny annexes are for elderly care, and actually save the Local Authorities money in the long term (as well as freeing up much needed housing in the process) it was no real surprise when the Government were forced to reconsider their Granny Annexe Council Tax as being unfair.
So much so that in 2014 the Government scrapped the “unfair surcharge” on family annexes, which saw two separate council tax bills levied on the same home if it had a ‘granny flat’, ‘granny annexe’ or similar extension.
The two dwellings were treated as separate dwellings, each requiring Council Tax to be paid under the relevant Council Tax Bands. This was then quickly revised and as long as the annexe is in use by a family member or the main house owner, Council Tax is payable at the reduced rate of 50% of your banding.
You can read more about this and whether you qualify for the discount on the Martin Lewis Money Saving site moneysavinexpert.com by clicking here.
But there is more to it when that family member is also classed as a dependent relative because they are then classed as exempt in most cases.
Granny Annexe Council Tax and Exemption
With annexes being built largely for dependent relatives and elderly care you may be exempt from paying Council Tax completely if the annexe is your only main home.
For example on the Canterbury.gov.uk website it states:-
An annexe will be exempt (which means you don’t have to pay council tax) if it is separately banded for council tax but forms part of another property and a dependant relative is living in it as their main or only home.
A relative is classed as dependant if they are:
- over the age of 65
- substantially or permanently disabled, or
- severely mentally impaired.
You can find out from your Local Council.
Who Owns The Granny Annexe?
This is one of the areas that provides the most conversations within members of the family concerned and can actually become so heated that the plans to build the annexe get completely put on hold due to inheritance issues and values of existing properties.
For family members looking to release equity and down size there are actually some incredibly beneficial reasons to do that in relation to Inheritance Tax (you can find out more about that below) and for the main property owner, the value of the main house will usually increase and become more desirable. While there are no golden rules on who owns the annexe as such (although most families consider it to be owned by the one paying for it), the annexe must remain part of the main property at all times and it therefore becomes part of the main property.
In a future resale it will be sold as one property ie. a house with a granny annexe.
We find that families looking to benefit from the situation usually come to a family agreement regarding any release of equity involved and appreciate the lifestyle benefits to all concerned outweigh the pure financial ones.
For a main home owner looking to build an annexe in the garden for a younger family member (such as a son / or daughter) the main value of the property is likely to increase overall although resale value will still depend on the main house location, size and value for any particular area.
In the long term, you can of course stand to save up to 40% on Inheritance Tax as a family and earn interest on any monies released and invested from any equity release whilst perhaps planning that world cruise you’ve always dreamed about too. Granny annexe living can sometimes give the new annexe owners a sense of security, belonging and being part of active family life again which can in turn be rejuvenating. In other circumstances granny annexes can also relieve the stress of keeping up with the maintenance costs of a larger property especially if your family member has lost their partner in recent years.
Living alone for ageing parents is a concern for both them and their families.
Granny Annexes And The 7 Year Inheritance Tax Rule
If you are looking to sell a main family home and use the equity released to finance your annexe project, you will need to check with a qualified Financial Advisor for the best way to manage any potential Inheritance Tax benefits with regards to the 7 year Inheritance Tax rule that could work in yours and your family’s favour now and in the not too distant future.
According to the Gov.UK website with regards to inheritance tax:–
If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your tax-free threshold will increase to £425,000.
Giving away a home before you die
There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.
If you want to continue living in your property after giving it away, you’ll need to:
- pay rent to the new owner at the going rate (for similar local rental properties)
- pay your share of the bills
- live there for at least 7 years
You don’t have to pay rent to the new owners if both the following apply:
- you only give away part of your property
- the new owners also live at the property
- Granny annexes are typically exempt from Council Tax or it may be payable at a reduced rate in certain circumstances.
- Family decisions with regards to granny annexes can become complex with regards to inheritance issues, however the best granny annexe living outcomes are always the ones based on lifestyle changes that are beneficial to all.
- Granny annexes must remain part of the main property at all times – if the property with a granny annexe is to be sold, it will be classed as ‘a house with a granny annexe’.
- There are potential Inheritance Tax savings involved that could benefit the family as a whole that need careful consideration and research when making this all important decision.