Granny flat options compared: ownership, life interest, lease or licence

Granny flat arrangement options in Queensland at a glance

Every arrangement we see is a version of one of these. They are listed from strongest protection for the older person to weakest.

• Co-ownership — the older person goes on the title as tenant in common for a recorded share. Strongest protection and clearest exit, but transfer duty and CGT apply, and the share is an assessable asset for the pension.
• Registered lease — the owner keeps the title, the older person holds a registered long lease for life or a fixed term. Binds a buyer, a mortgagee (with consent) and the owner's trustee in bankruptcy. Duty may apply to a premium.
• Life interest or right to reside — a documented personal right to live in the home for life, sometimes noted on title by caveat. Protects occupation, but does not itself repay the money.
• Licence to occupy plus a loan secured by mortgage — the money is repayable and the mortgage secures it, while occupation runs under a written licence. Often the practical middle ground.
• Bare unwritten arrangement — a promise and nothing else. Cheapest today, and the one that ends up in the Supreme Court.

Option 1: co-ownership — going on the title

The older person is registered as a tenant in common for a share reflecting their contribution. Their money is visible and provable, they share in capital growth, and their share passes under their own will rather than the owner's.

The trade-offs are cost and inflexibility: transfer duty on acquisition, potential CGT and main residence exemption issues on later sale, the need for the mortgagee's consent, and the fact that the share is fully assessable for the age pension. A co-ownership agreement should sit alongside the transfer dealing with outgoings, sale triggers and buy-out rights.

Option 2: registered lease — the strongest right short of title

A lease registered over the lot gives an interest in land that survives a sale, and it can be structured for life or for a long fixed term at a nominal rent with a premium paid up front.

It is the option that best answers the question 'what if the house is sold or the owner goes bankrupt?' Practical hurdles: the mortgagee must consent to registration, a survey plan may be needed if only part of the lot is leased, and body corporate by-laws matter in a community titles scheme.

Option 3: life interest or right to reside

A life interest gives the right to occupy and, depending on the drafting, to receive income from the property. A right to reside is narrower: personal occupation only, usually ending if the person moves permanently into aged care.

Both protect occupation, but neither automatically returns the capital. If the older person needs a refundable accommodation deposit for aged care in five years' time, occupation rights alone will not fund it — pair the right with a repayment formula.

Option 4: licence to occupy plus a secured loan

Here the contribution is documented as a loan to the owner, secured by a second mortgage or a caveat, and occupation is granted under a written licence. The money is clearly repayable, the security ranks against the owner's other creditors, and there is no transfer of an interest in land that triggers duty on the way in.

It is often the cleanest fit where the family wants the property to stay in one name, and where the older person's real concern is getting the capital back rather than sharing in growth.

Comparing the options: sale, bankruptcy, repayment, pension and tax

Use these five tests on whichever structure is proposed:

• Survives a sale of the house? Co-ownership and a registered lease do. A licence and an unregistered right usually do not.
• Survives the owner's bankruptcy or separation? Title share, registered lease and a registered mortgage do. Promises do not.
• Gets the money back? Co-ownership and a secured loan do. Life interests and licences do not, unless a repayment clause is added.
• Pension treatment: a granny flat interest can avoid the five-year deprivation rules where the arrangement is genuine and reasonably valued; a title share is an assessable asset instead.
• Cost and tax: transfer duty and CGT bite hardest on co-ownership and on premiums for leases; a loan-plus-licence is usually the lightest, but the least share in growth.

10 questions to ask before you sign a granny flat agreement

Bring the draft to the appointment and work through these. If the arrangement cannot answer them in writing, it is not ready to sign.

• What exactly am I receiving for my money — a share of the title, a lease, a right to reside, or a repayable loan?
• What is the repayment formula if I leave, and is it my original contribution, an indexed figure, or a share of the sale price?
• What happens if I need residential aged care and a refundable accommodation deposit?
• What happens if the owner separates, dies, is made bankrupt, or wants to sell?
• Does the bank need to consent, and has anyone asked them yet?
• Who pays rates, insurance, utilities, repairs and body corporate levies, and what happens if they are not paid?
• Has Centrelink's treatment been checked against the reasonableness test before the money moves?
• Has the accountant confirmed the CGT and main residence position for the owner?
• How do we resolve a disagreement without going to court, and who pays for that process?
• Do both wills reflect the arrangement, and has the risk of a family provision claim been considered?

Why both sides need independent legal advice

The older person and the property owner should each have their own lawyer. It is not a sign of mistrust — independent advice is what makes the agreement hold up if a sibling, a former spouse or a trustee in bankruptcy attacks it later. Coastside Law can act for either side and will tell you plainly when the other party needs to get their own advice.

Granny flat arrangements in Queensland: frequently asked questions