Tuesday, February 23, 2021

Granny flats and rights to occupy ... now what kind of mess have you gone and gotten yourself into?**

Previous posts have considered the creation of life estates under an estate plan where a willmaker is wanting to allow a particular beneficiary the right to reside in a property without gifting it to them directly. 

As set out in the earlier post, the creation of a life interest is rarely appropriate as part of a modern day estate plan. 

One potential pathway mentioned in the previous post was using a right to occupy under a will. 

While a right to occupy under a will can be a tax effective solution, creating a right to occupy during a person’s life is often very tax ineffective. 

With the increasing interest in (for example) having parents live in a ‘granny flat’ style arrangement on the property of one of their children, the issues in this regard are important to be aware of. 

In very broad terms (that is, there are a number of potentially different outcomes depending on the factual matrix), the key issues to be aware of in this regard include: 

  1. Any payment of money for the right to occupy a granny flat gives rise to a capital gains tax (CGT) event, namely CGT event D1.
  2. CGT event D1 is triggered even if the granny flat may have previously formed part of the main residence of the children.
  3. The CGT is payable with reference to the consideration provided for the grant of the right to occupy, regardless of whether the arrangements are documented or not.
  4. Where consideration is paid that is less than market value, the market value substitution rule can apply as the parties will generally not be seen to be dealing with each other at arm’s length.
  5. If there is truly nil consideration, there should be no CGT payable.
  6. The termination of a right to occupy on the death of the parent will not cause any CGT event.
  7. Similarly, if the person holding the right to occupy relinquishes that right, there will be no CGT consequences as long as they receive no consideration and the property was their main residence during the term of the occupancy.
  8. Finally, the right to occupy the granny flat should not impact on the ability for the owner of the main dwelling to access the CGT main residence exemption.
As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, the title of today’s post is riffed from the You Am I song ‘Hourly daily’. View hear (sic):