Granny flats have become a popular option for many families over recent years, as they provide the perfect solution for those looking for additional living space or an extra source of rental income. However, those who are considering adding a granny flat to their property need to be aware of the potential tax implications involved, particularly in relation to capital gains tax.

What is a Granny Flat Agreement?

A Granny Flat Agreement (also known as a Granny Flat Interest or Right to Occupy Agreement) is a legal agreement between family members or friends. It allows for one party (usually an elderly parent) to transfer assets to another party (usually an adult child) in exchange for the right to live in a granny flat or on a property.

Capital Gains Tax

Capital gains tax (CGT) applies to any profits that are made from the sale of an asset. This tax is relevant when considering granny flats, as adding a granny flat to a property can increase the value of the property. If you decide to sell the property and make a profit, you may be liable to pay CGT on that profit.

However, if you enter into a Granny Flat Agreement, the rules around CGT are slightly different. The transfer of assets is considered an exempt transaction, which means that no CGT is payable at that point. However, if the property is sold in the future, CGT may be payable on the market value of the property at that time.

There are a number of complex rules around CGT and Granny Flat Agreements, so it is important to seek professional advice before entering into any agreements.

Other Tax Implications

In addition to CGT, there may be other tax implications associated with granny flats. For example, if you rent out the granny flat, you will need to pay income tax on any rental income received. You may also be liable for land tax or council rates if the granny flat results in a change in classification of the property.

Again, seeking professional advice from a tax expert is essential to ensure that you are aware of any tax obligations that may arise from adding a granny flat to your property.


Granny flats can be a great way to provide additional living space or rental income for your family. However, it is important to be aware of the potential tax implications involved, particularly in relation to capital gains tax. By seeking professional advice and understanding the rules and regulations, you can ensure that you make informed decisions and avoid any unexpected tax liabilities in the future.