Granny annexe tax: capital gains, inheritance tax and stamp duty

An annexe is usually built or bought for a parent who is starting to need help, and the tax questions come up alongside bigger ones about where they will live and how their care will work. If you are still weighing up the move itself, the guide to care at home or a care home sets the options side by side, and the granny annexes hub covers finding, building and paying for one.

Council tax is a separate local charge, and a self-contained annexe can have its own band, with an exemption or a discount when a relative lives there; whether a granny annexe is subject to council tax explains who qualifies. Building costs and VAT are covered in how much a granny annexe costs to build.

HMRC decides what counts as your home by looking at the dwelling as a whole. A separate building can be part of it when it sits close to the main house, within what the law calls its curtilage, and serves the house as somewhere to live. HMRC's own Private Residence Relief helpsheet, HS283, gives the example of a home made up of a house, a detached garage and a granny flat near the house, and treats all three as the dwelling. HMRC's Capital Gains Manual adds that relief should not be restricted for rooms occupied by the owner's children or parents, even when they have a room of their own.

So when you sell the house and the annexe together, and the annexe has been lived in by you or your parent, the gain is normally covered in the same way as the rest of your home. The garden and grounds also qualify, up to the permitted area of 0.5 hectares including the buildings on them, and a larger area only if the size and character of the house need it. Gov.uk's guide to tax when you sell your home has HMRC's checklist for the relief.

When the annexe is letSection titled When%20the%20annexe%20is%20let

If you let the annexe to a tenant, relief is reduced for that part and for the time it was let. HMRC's manual says a self-contained flat with its own entrance, let to a tenant, is treated as a separate dwelling. Since 6 April 2020, lettings relief of up to £40,000 has only been available where the owner lived in the home at the same time as the tenant. Letting out a granny annexe covers the planning conditions as well as the tax.

When the annexe or its plot is sold separatelySection titled When%20the%20annexe%20or%20its%20plot%20is%20sold%20separately

HMRC looks at garden land on the day it is sold. Land sold while you still own and live in the house can qualify if it is within the permitted area and is still garden on that day. Land kept back and sold after the house gets no relief. HMRC also treats land under development as no longer garden. If you are planning a separate sale, take advice before you apply for planning permission or start any work.

Inheritance tax is charged at 40% on the part of an estate above £325,000, a threshold that can rise to £500,000 when a home is left to children or grandchildren. Lifetime gifts count towards the estate for 7 years, and where tax is due on a gift made 3 to 7 years before, the rate is lower. Each person can give £3,000 a year free of inheritance tax, and regular gifts from spare income are exempt too. Gov.uk's page on the rules on giving gifts has the full rules and worked examples.

If your parent pays for an annexe on your landSection titled If%20your%20parent%20pays%20for%20an%20annexe%20on%20your%20land

When a parent gives their child money and the child builds the annexe on their own land, the parent has made a gift of cash. HMRC's manual says the tracing rules for gifts with reservation do not follow an outright gift of cash into what it buys, so living in the annexe does not, on its own, keep it in the parent's estate. The manual also warns that linked steps can turn a cash gift into a gift of something else, and the pre-owned assets rules can charge income tax on someone living in property they helped to pay for. Whether that applies to a build depends on the set-up, so ask an adviser before the money moves.

If your parent gives you their house and lives in the annexeSection titled If%20your%20parent%20gives%20you%20their%20house%20and%20lives%20in%20the%20annexe

Gov.uk is clear about a parent who gives away their home and carries on living in it. To keep it out of their estate, they need to pay rent to the new owner at the going rate for similar local properties, and pay their share of the bills. Otherwise it counts as a gift with reservation and is added to the value of their estate when they die, however long ago the gift was made. There is no need for rent where only part of the property is given away and the new owners live there too. Gov.uk's page on passing on a home sets out both rules.

HMRC's manual has one narrow exception for an older parent. A parent's occupation of land they gave away is disregarded where it follows an unforeseen change in their circumstances, they can no longer look after themselves because of old age or infirmity, and living there is reasonable provision by a relative for their care. It is meant for a change nobody planned for, so it is unlikely to help an arrangement that was planned from the start.

Until 1 June 2024, a buyer could claim Multiple Dwellings Relief on a house with a self-contained annexe, which usually lowered the bill. It was abolished for purchases completing on or after that date. Whether a granny annexe adds value has a worked example of how much difference this makes on a typical purchase.

The higher rates, 5 percentage points on top of every band since 31 October 2024, are the other rule. An annexe does not trigger them by itself when the main house is worth at least two thirds of the total. The buyers can: when two people buy together, the higher rates apply to the whole purchase if either of them owes them, so a parent who has not yet sold their own house can bring them onto a purchase made with their child. Gov.uk's guidance on the higher rates of stamp duty sets out the conditions, and buying a house with an elderly parent covers how to set up joint ownership.

Revenue Scotland publishes the rules for Land and Buildings Transaction Tax, and the guide to Wales's Land Transaction Tax is on gov.wales.

1. 1

   Write down who owns what

   At the start

   Note whose name the house, the land and the annexe are in, and who is paying for what. Every tax question on this page depends on the answer.
2. 2

   Decide whether a parent's money is a gift, a loan or a share

   Before the money moves

   Each one is taxed differently, and each affects what happens if the house is sold or your parent needs care. Record the choice in writing, with a loan agreement or a declaration of trust where one fits.
3. 3

   Take advice on your own arrangement

   Before you sign anything

   A solicitor or chartered tax adviser can look at your family's figures. If you cannot pay for advice, the charity TaxAid gives free tax help.
4. 4

   Bring wills and powers of attorney up to date

   Once it is agreed

   A will that still leaves the house in equal shares may no longer match who paid for the annexe. A lasting power of attorney lets someone manage your parent's money if they cannot.
5. 5

   Plan for the cost of care as well

   Alongside the build

   An annexe keeps your parent close, but it does not cover the help they may need with washing, meals or medication. Over several years that cost can be larger than any of the taxes above.

TaxAid is the charity that gives that free help. For a change to a will, will writing and protecting assets explains the options, and lasting power of attorney covers how to set one up while your parent can still make the decision.

Planning the care alongside the annexeSection titled Planning%20the%20care%20alongside%20the%20annexe

The tax on an annexe is usually a one-off cost, while care is paid for week after week, and over a few years it can be the larger sum. Carers on PrimeCarers charge £18 to £25 an hour with our fee included, against £28 to £35 an hour at an agency, and live-in care starts at £1,050 a week. Our pricing shows how those figures are made up, and the funding care guide explains what the council, the NHS and benefits can pay towards. Care in a granny annexe covers how visits and live-in care work when your parent lives at the bottom of the garden, and a granny annexe or a care home compares the two over several years. When you are ready, you can search for carers near the annexe and compare their rates.