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To attempt to get people to formalise granny flat arrangement to give the elderly the rights they need the Treasury has released draft legislation to make an exemption from CGT.

To avoid CGT on these granny flat arrangements, the Board of Tax indicated that people would not formalise granny flat arrangements, and this could lead to elderly paying for the granny flat and then getting kicked out of the flat.

This proposed change will ensure that a CGT event does not happen on entering into, varying or terminating a granny flat interest.

 A granny flat interest is one that confers on an individual the right to occupy a dwelling for life and note that a granny flat interest does not have to relate to properties often referred to as ‘granny flats’ as it is not a description of the type of property. An individual can have a granny flat interest in a wide range of properties, such as a family home or a family’s rental property or holiday home.

However, eligibility to hold a granny flat interest for the purposes of the CGT exemption is restricted to individuals who have reached pension age or who have a disability that means they require assistance for most day- to-day activities for at least 12 months.

The requirements are then for a person to who is eligible to hold a granny flat interest and another person to agree in writing to a granny flat interest over property.

But most importantly, the arrangement cannot be of a commercial nature. This will mean the holder of the granny flat interest will not pay rent to occupy the accommodation, but they could merely contribute to the costs of running the household that they are part of.

Here is the Treasury’s example…

Edith is an 80 year old widow. Living by herself in the family home is too much for her to manage. She intends to sell the home and move in with her daughter Christine and her family. Christine’s house is not big enough for Edith to live in comfortably and it is decided that Edith will contribute to the costs of building a self-contained flat on the property. Edith and Christine enter into a written agreement under which Edith contributes $200,000 towards building the flat on Christine’s property and acquires a right to live in the flat for life. The agreement also provides that it will terminate should Edith permanently vacate the unit in order to move into a residential care facility.

Under the exemption, the CGT event D1 that would otherwise have arisen from the creation of Edith’s contractual right to live on Christine’s property, will not happen. In addition, should Christine sell the property, the existence of the agreement, and Edith’s separate use of the flat, would not affect Christine’s or Edith’s ability to claim the main residence exemption.