Different generations are choosing to live together again. With home ownership becoming more difficult for younger people to achieve and people living active lives for longer, we increasingly have conversations with clients about how to make inter-generational living work for them.
A useful tool is the granny flat interest. The granny flat does not have to be a separate unit attached to the house, it can also be a bedroom in the house or separate dwelling on the same property.
The interest is created by the agreement that, for example, a parent is to live in their child’s family home for the foreseeable future.
The parent is usually planning to down-size and has a lumpsum available to contribute to improve the home, or for the adult child to buy a bigger home.
It is easy to see the benefits: everyone has a closer connection to family; the parent has someone around to assist them as they age; and the adult child can more easily manage a larger house.
A significant cash contribution is usually involved, so it is important that the family sets up the arrangement before the move happens. The Social Security Act 1991 (Cth) and Veterans’ Entitlements Act 1986 (Cth) recognise a granny flat interest, which may be excluded from asset value calculations if created properly. The tax and duty consequences also have to be considered from all sides.
Recent changes to tax legislation include Capital Gains Tax (‘CGT’) exemptions relating to granny flat agreements. With effect from 1st July 2021, no CGT is payable when you enter, vary or terminate a granny flat agreement. This exemption does not extend to a property transaction that has to happen to give effect to the granny flat agreement. However, if the property being transferred is a principal residence, then that is usually exempt from CGT under different sections in the tax laws.
It is the family relationship issues, which may not be considered at the time the idea is first floated, that we most often work with clients to resolve before they arise. The most effective way to do this is by a granny flat agreement.
The issues we see most frequently are:
- over time, the older person requires care which the family can no longer give in a home setting;
- other adult children in the family cannot access their parent in the same way they could before;
- unforeseen career changes or a marriage breaks down and the house has to be sold; and
- the impact on estate planning is the most common concern, for both generations.
These can be difficult conversations to have at a time when everyone is feeling positive about the plans. However, there are simple solutions and we see that families are always glad to have the difficult questions answered at the beginning.
The granny flat interest does not have to be in writing. The benefit of a written agreement is the clear communication which prevents disputes later on. Everyone in the family can be involved if they wish and no-one has to rely on memories of conversations from years before.
How can we help?
If you would like to have a chat about your family circumstances, please contact our Wills & Estates team on 02 6285 8000 or by email.