Care home fees – take care when gifting assets
This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking any action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA before taking any investment decision.
Care home fees is arguably one of the largest expenses a person is faced with in the old age. It is often a bigger cost than Inheritance Tax and is payable by people with estates well below the Inheritance Tax threshold. Careful planning should therefore be undertaken well in advance especially if you intend to seek local authority funding.
Most people needing residential care will be expected to pay something towards the costs of residential care from their income and/or capital. If the local authority is involved in arranging care, the amount you may have to pay will be worked out via a "means test". Most forms of income, capital and savings such as bank accounts, National Savings accounts, Premium Bonds, stocks, shares and property are included in the means test.
Certain income such as disability living allowance, charitable payments, payments made because of personal injury are disregarded. Certain pension income can be partially disregarded. Some capital is also partially or fully disregarded or ignored. Capital that is disregarded includes the surrender value of life insurance policies or annuities and the value of funds held in certain trusts. The treatment of trust money depends on what rights you have under the terms of trust. Personal possessions are disregarded as long as they were not bought with the intention of avoiding residential care charges (discussed below).
When the capital is valued its market value is used. Any outstanding debt secured against the asset will be deducted from the capital value.
The funding rules
The rules in relation to funding residential care have recently been changed and from April 2016 there will be further changes. Currently you are expected to meet the full cost of your residential care if your eligible capital (e.g. savings and property) is over £23,250. If the capital value is between £14,250 and £23,250, the capital is assessed to show an assumed income. For every £250 or part of £250 of capital between £14,250 and £23,250 you are assessed as though you have an extra £1 per week income. For example, if you have capital of £14,550 you will be treated as having an extra £2 per week income. Capital of £14,250 or less is fully disregarded.
In April 2016, the upper and lower capital limits for residential care are planned to be radically changed from the present levels of £14,250 and £23,250. They will be set at between £17,000 and £27,000 where the value of your property is disregarded, or between £17,000 and £118,000 where the value of your property is taken into account. This is intended to increase the number of people eligible for financial support from a local authority, but it will also create a much higher assumed income calculation, when someone's capital assets are between the thresholds. When the assumed income is added to other income in the means test it will create a higher chance of you being defined as a self-funder due to your income than is presently the case.
Giving assets away
Residential care is expensive and many care home residents have to sell their property and other assets in order to be able to meet care home fees. It is understandable that many will think of gifting property to relatives or divesting themselves of assets in any other way so that these are not used to pay for care. Careful planning is needed here and last minute action is to be avoided.
What are the issues?
Firstly, gifting assets to children may be risky. It can create tension or even lead to a relationship breakdown. There are also various tax implications such as Capital Gains Tax on gifts of assets other than your main residence and the "Gift with Reservation of Benefit" rule for Inheritance Tax. The former is not a problem if your only asset is your home as you will be able to claim the Principal Private Residence Relief when gifting it. The donee will however have to pay Capital Gains Tax on subsequent sale unless they use the property as their main home throughout their period of ownership. As far as inheritance tax is concerned, if you continue living in the property after you have given it away (which is often the intention when the property is gifted to children), the property may be considered as remaining a part of your estate and inheritance tax will be payable on it. Creation of a trust may be a solution to family problems and tax considerations; however, all the above options may simply not work in relation to care home fees.
Local Authority Powers
If you give away assets or otherwise dispose of them in order to put yourself in a more favourable position to get local authority assistance, the local authority may be able to assess you as if you still own the assets. The local authority will look at any of the following and may seek to prove that you have deprived yourself of assets with the intention to reduce your care home fees:
- You have incurred a substantial expenditure (e.g. have purchased an expensive item or have gone on an expensive holiday or have been leading an extravagant lifestyle);
- You have settled money and property into an irrevocable discretionary trust;
- You have made lump sum payments to someone else (e.g. large gifts of money to children);
- You have given away assets (e.g. gifts of property to children);
- You have invested in certain products which are disregarded under the means test (e.g. a bond with life insurance).
Many mistakenly think that if you dispose of an asset at least 6 months before entering a care home, the local authority will not be able to take the asset into account when calculating your income and capital under the means test. This is wrong because there are no time limits and the local authority need simply prove that avoiding care home fees was the key motive for giving the assets away. There are regulations and statutory guidance which allow a local authority to use its discretion when assessing the timing and motive for the transfer of an asset which would have been otherwise taken into account under the means test.
You should consider taking action well in advance of any need for a care home. Gifts of modest amounts early on and the downsizing of your home and gift to children of the surplus cash a few years in advance of the need for a care home will have a much higher chance of success. This of course increases the risks that you will have insufficient funds for your retirement.
Alternative ways to finance residential care
There are may be ways to help fund the residential care. For example, you could rent out your main residence after you have moved to a care home and use the rent towards the care home fees. In addition, you will be able to get extended Principal Private Residence Relief on the sale of your property. Normally you do not pay capital gains tax if the property has been your main residence through the whole period of ownership. If you move elsewhere and then sell after some time, when the property is not your main residence, you are still able to get the relief for the last 18 months of ownership, in addition to the period of actual occupation. This period is extended to 36 months if you move to a care home.
It may also be worth looking into whether you can claim attendance allowance, disability allowance or personal independence payments. This may be possible if the residential care is self-funded.
You should not rush to gift all your money to relatives and friends as this may not achieve the desirable effect. Careful planning and professional advice prior to taking any steps is recommended.
David Anderson Solicitor Advocate, Chartered Tax Adviser and barrister (unregistered)
Olga Tabenko Solicitor
Sykes Anderson Perry Limited
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London EC2M 5QQ
Telephone 020 3794 5959