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Sam, Accountant
Category: Tax
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My mother built a granny flat, attached to her daughters home,

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My mother built a granny flat, attached to her daughters home, using her savings. 3 months after moving in she died. She had another property which is now being sold. Is the granny flat to be considered as part of her estate or a gift to the her daughter in whose name it was constructed and paid for? Are their any IHT or gift tax considerations? The estate value is below the IHT threshold of £650k.

Thanks for your question. I am Sam and I am one of the UK tax experts here on Just Answer.

As you seem to suggest that your mother gave her daughter the money - and the daughter paid (from that) the costs to build, then the money has to be treated as a gift if less than 7 years passed from the date of making this gift to the date of death.
However you also state that your mother built the granny flat - so this seems to confuse the issue further.
Had your mother paid for the construction of the build directly, then this would be treated as part of her estate and a valuation of the house pre granny flat build and post build would have to be obtained in retrospect to establish its value.

However if your mothers total estate (including this gift or value of granny flat) is in excess of £325,000 (if its just her allowance) or up to £650,000 if your mother was a widow and her late husband did not use all of his allowance)then there is no Inheritance tax to pay.

A consideration as to whether this granny flat was included in the will, would indicate if your mother considered it her asset. And if this is not clear then could the granny annex be sold away from the main house, does it have it own entrance, have its own unity supplies etc - but you would then need to seek a ruling from HMRC just to make sure the declaration made to HMRC for Inheritance tax purposes was accurate.

But I am surprised the solicitor is not aware of the law in matters such as this, but it would appear either way - if there is unused NIL IHT band for mothers late husband, then its still going to leave a NIL tax position.

Please do feel free to ask follow up questions



Gift tax is considered within the final estate (so falls into consideration for Inheritance tax, as advised above)
Customer: replied 3 years ago.
Thank you Sam, it seems my mother may have paid some of the building costs directly and some by giving my sister cash. There is no mention in her will of it being part of her estate and it is attached to my sisters house, therefore could not be sold, although it does have a separate entrance. Utility supplies are provided via the main house with no separate utility accounts.
It seems that after all consideration the money spent, on this annexe, has to be thought of as a financial gift and as the main executor, which part of IHT 205 would you recommend I complete?
Are there any gift tax implications for my sister
Many thanks.
Please confirm if I am committed to £28/m or is this a one off charge£.
Hi Brian

Thanks for your response

On the basis of what you advise , I would be inclined to
So section 2 would cover the amount relevant as a gift (so collate the details of what money was actually given to her daughter and enter that here) and then also section 9.1

And of course the rest of the form for any other assets, pensions and money held.

If the total value of the estate including the full cost of the gift is less than the permitted inheritance tax threshold (as advised above with sole/joint Inheritance tax NIL exemption limit) then there are no Inheritance tax arising - AND we do not have gift tax implications - the amount received is NOT treated as income and not liable to any tax due to the receipt of this amount.

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Customer: replied 3 years ago.
Hi Sam, thank you again.
To clarify the situation a little further as I am still a little confused, it seems that my mother can spend upwards of £70k on an annexe to my sisters home, to construct a self contained apartment, yet not be liable for any gift tax implications, whereas if I was given £10,000 as a gift in any one year, I would have to pay a gift tax for anything in excess of £3000, assuming I had received the latter amount for previous years. Does the same not apply to money given for the purchase of a granny flat?
Hope that's clear, but I'm not so sure.
Many thanks.
Hi Brian

Thanks for your response

No you do not have to pay gift tax - there is no such thing!
The fact the gift to you is in excess of £3000 just means that it also has to be added into the estate for Inheritance tax purposes - if less than 7 years have lapsed.

Tax will only then be due if the total estate (including the gift to you and the granny flat build) is in excess of the IHT threshold.
So the same rules apply


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