Granny Annexes & The 7 Year Inheritance Tax Rule


For a lot more families today, multi-generation living has become a way of life mainly due to our average life expectancy increasing.

“At the same time, we live in expensive times where 33.3% of young adults aged 18-36 who rent typically pay more than a third of their net income (after tax) to their landlord.

And a similar proportion of 25-34 year-olds in privately rented flats are in properties that do not meet the decent homes standard.” 

(Source of information The Guardian 2017)

Which means in real terms that millennials spend 3x more of their income on housing than their Grandparents did.

So the often referred to “bank of Mum & Dad” or “bank of Grandmother & Grandad” are coming to the rescue more and more frequently as they look for the best ways to free up equity in their homes and help their family members out at the same time.

If you are thinking of annexe living as a way of downsizing to free up equity, you may not know about the Inheritance Tax 7 year rule that might benefit you and your family not just now, but in the future too.

Disclaimer: The information within this article has been researched fully for the purpose of creating this article. It is not to be considered financial advice or as the only way or best way to go about Equity Release. Please consult an independent financial planner for any financial advice before you release equity from your home.

Inheritance Tax / Gifting

It’s worth researching everything you can about the right way to go about Inheritance Tax gifting.

“Making a gift to your family while you are still alive to see the benefit can be a good way to reduce the value of your estate for Inheritance Tax purposes.”

(Read more about this on Money Advice by clicking here.)

If it is done in the right way, it can potentially save you up to 40% in Inheritance Tax as shown here on the GOV.UK website.

In simple terms, as long as you live more than 7 years from when you make the gift, your children or family won’t have to pay Inheritance Tax on your gift when you die. For example: If that gift was £100,000 it could potentially be an Inheritance Tax saving of up to £40,000 which is worth considering as a family.

Resources to research more about this important topic include:-  MoneyAdviceService.Org.UkGov.Uk

Keep Good Records Of Any Gifts You Make

Money and families are an emotive cocktail that can turn very sour, very quickly.

I’m sure almost everyone one of us has experienced that first hand in recent years. (I know we have). However good your relationship is with your family members, it is always good practise to :-

  • Keep an accurate record of what you gave.
  • Who you gave it to.
  • When you gave it.
  • How much it was worth.

What Counts As A Gift?

According to the GOV.UK website, a gift can be:

  • Anything that has a value, such as money, property, possessions
  • A loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift”
Exempted Gifts

And as a guideline again from the GOV.UK website there are also some gifts that are exempt from Inheritance altogether which may help a family member out in another way without releasing equity.

For example, you can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can also carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

How Much Would Make A Difference To Your Family?

Every one of us would love to help someone out if we could and for every family the situation is going to be different. We’ve seen families downsize from the main house to an annexe in the garden to let their son or daughter and buy the main home as their own.

We’ve seen other families free up equity to buy an annexe for elderly parents so they can assist with day to day living needs.

We’ve seen Mums & Dads buy an annexe for young adults (some were single parents facing an insurmountable task of ever getting a home of their own in any other way).

And we’ve seen equity releases to annexe living for childcare assistance, disabled living, freeing up time & money for travelling more, recently divorced young adults and families and more.

They make great financial sense when compared with some of the expensive alternatives to UK home ownership today.

And they can help a family member have a home of their own now that the whole family can benefit from in years to come.

Prices start with these 3 lovely garden lodges:-

  1. The Accolade (from £81,892)
  2. The Harleigh (from £99,847)
  3. The Sonata (from £100,915)

Please take the time to research any kind of equity release very carefully and consider how multi-generation living can not only help family members today, but help you & your family in the future too.


As always we look forward to your thoughts and comments below or join in the conversation on our Facebook Page !

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