Valuation of granny annexe for IHT

Deceased paid £86000 less than 2 years ago for a posh granny annexe to be installed at the bottom of her daughter’s garden. This was not a gift to daughter, it was the deceased’s property installed on daughter’s land. She moved in at the end 2016 but died suddenly and unexpectedly in September 2017. Planning permission obtained for the structure as ancillary to the main house (all services linked to the house). Access is through the main house (plus narrow side passageway).
There is seemingly no second hand market in granny annexes as they are permanent structures and cannot be dismantled without ruining most of the materials. The annexe has probably increased the value of the daughter’s property but what is the value to the deceased’s estate for IHT purposes? Is this virtually zero if there is no sale value? Has anyone had experience of how HMRC view this situation please?

Lucy Watson
Brain Chase Coles

Given it was land, how exactly was it the deceased’s property? Did she have a formal lease/freehold title to that part or the land it was built on? Absent that, is it possible that she only had had a tenancy or, more likely in the circumstances, a licence to occupy? The other alternative would be that she had generated a proportionate beneficial interest in the entire property.

If she did actually own it, then I would have thought your first instinct is correct and, applying the usual rules, you would find it has virtually zero market value.

Andrew Goodman
Osborne Clarke LLP


1.she paid for it and the value accrued to the daughter without any rights attaching or documentation or trust, or

2.she built it, on the understanding she would be allowed to live in it for as long as she wanted, and it would then pass to the daughter, or

  1. she built and paid for it, and there was an implied licence to use it

There must have been some discussion, even if no formal documentation, as to the intentions.

If it is 1, then it was a PET of the cost. I cannot imagine 1 applying, after all she put £80,000 of her money into it.

If it was 2, it was a lifetime chargeable transfer of the cost and a relevant property trust.

If it was 3, it will pass under her Will, and there would again have been a PET, as by building it on the understanding she only had a licence to use it and no other rights, she reduced the value of her estate by the cost of the building.

Simon Northcott

Yes Andrew but has she not made a gift to the daughter of the enhancement value to the daughter’s property at the very least and therefore a failed pet. Assuming there was no formal agreement for her to occupy the granny flat, it would seem harsh to say that she has gifted the daughter the cost of the flat by building it on the daughter’s land though HMRC may seek to take that line.

Patrick Moroney
BWL solicitors

The granny-annex became part of the land owned by the daughter. There appears to be no separating off of the annex and the surrounding land.

One scenario might be that granny said to daughter I’d like to live near you; what about if I paid for a separate annex to be built and I live in it until I die and then it will become yours. No documentation, not trust just a mutual understanding.

Granny (and daughter) may have been under the impression that granny “owned” the annex but prima facie she didn’t.

It would then appear that granny made a PET and then failed to survive the 7 years. The PET would then be the cost of the build.

For the daughter her land may have increased but the increase would not seem likely to be the £86,000 and in isolation the annex would have a pretty low market value.

Malcolm Finney