Most people wish to pass something on to their families or loved ones when they pass on and more and more people are becoming concerned about the possibility of care costs diminishing their estates prior to their death leaving little or nothing to pass under their Wills following their deaths. The information provided on this website is given purely for informative purposes and highlights some of the concerns often raised by our clients which may assist you when considering your own financial provisions for old age and death.
Firstly, we would wish you to consider making a Will as without a Will you are relying on the laws of intestacy and in many cases what someone thinks will happen with their estate when they die is not in fact the case. We can provide information on what would happen to your estate upon intestacy, i.e. dying without a Will as the law stands at present, to show why considering making a Will is of importance to our clients.
We are also regularly requested by our clients to advise on ways to safeguard the family home from the burden of care costs so that this item of estate can pass on to their families or other beneficiaries following death. We have therefore included in this leaflet a summary of how care costs may affect you and possible ways in which some protection may be afforded. Again we would reiterate that we are in no way suggesting the avoidance of paying care costs merely considering asset protection for future generations. For the avoidance of any doubt whilst reading the information contained herein we would advise that there is no time limit as to how far back the council can go to find out if assets were given away to avoid care costs. There is therefore no full proof mechanism to pass assets from your own estate without falling foul of the Council Assessment of your assets should you require to go into care or in some cases the tax implications at the time of passing of assets or on death. Each case being specific to the person. The seven year rule that you will no doubt hear people refer to refers to Inheritance Tax planning only and no such rule applies for depravation of assets to elevate payment of care costs.
If you go into a nursing home you will be assessed to establish whether you are able to pay your own care costs or whether care will be provided to you without payment. If a care home provides nursing care the NHS normally contribute approx £110 (at this time) towards the fees, however, care costs can be substantial and can presently run into around £600 per week or more - consequently any long term care costs will be very significant. The value of your house will be included (except in certain limited circumstances such as the house still being occupied by your husband/wife/civil partner (hereianfeter throughout this document referred to collectively as “Partner”) or an elderly relative. The local authority financial assessment form will ask whether you have made any gifts within the past six months and whether you have disposed of the house you were formerly living in prior to entering the nursing home even if that disposal was many years ago.
Capital and the value of your home
- If you have over £23,500 in capital you will be assessed as being able to meet the full cost of your care your capital will be counted as generating an income as follows:
- Over £23,500. You will be assessed as being able to meet the full cost of your care.
- Between £14,000 and £23,500. Capital between these amounts will be calculated as providing you with an income of £1 per week every £250 of your savings.
- £14,000 or under. Your capital will be ignored in calculating how much you have to contribute to the cost of your care
If you own your home then it will usually be counted as capital 12 weeks after you move permanently into a care home. The value of your home will not be counted as capital if certain close relatives still live there.
If you are assessed as needing nursing home or residential care, you will be asked to claim any Income Support Benefits or Pension Credit you may be entitled to and these will be taken into account on a means test to ascertain how much you can afford to pay. Normally you will have to pay all your income towards the fees, less approx. £23.00 per week you must retain for personal expenses. You will receive your free personal care and nursing home allowances as appropriate to set against any fees you may have to pay.
Be aware that if you give away money or assets and the Local Authority take the view that this was done principally to enable you to qualify for help with care costs then the local authority can look back at the transaction, even if it took place many years ago, and the value of the house, other assets or cash given away can be taken into account as notional capital when assessing your liability to contribute to the cost of your care.
Inheritance tax (IHT)
All assets passing on death Partner to Partner (if using class as above) are IHT exempt. Any items passing to non exempt beneficiaries (i.e children and other beneficiaries other than your Partner) are free of IHT up to the level of IHT threshold, currently £325,000. This means, if you leave part of your estate to your children the first part, commonly called the “Nil Rate Band” (Currently £325,000), is free of IHT but everything over this is taxed at 40%. If any assets pass to non-exempt beneficiaries on the death of the first Partner then this will reduce the transferable nil rate band available on the second death. Again nil rate band transfers are still part of the succession law at present but this may change with changing governments. If no such non-exempt transfers are made on the second death, as the law stands at present, then two nil rate bands at the time of death would be available, i.e. as the law stands at presents a threshold of £650,000 before IHT would be paid on the second death. Any assets placed in a liferent Trust for your Partner, as later discussed in this note, will also be added back to their estate on the second death for IHT purposes and the trust will be responsible for its share of any IHT due. Further details on your own IHT position can be discussed if you are of the view that this is relevant to your own personal circumstances. Please note that is your own responsibility, should you consider any actions necessary at this time, to keep yourself up to date with changes in the law as our firm cannot check through the vast amount of Wills, Trusts, etc. we hold to ensure that any change would not effect the planning put in place.
If you want to leave your house or your interest in the house to your Partner and thereafter he or she leaves it to your children your Partner’s estate will include his or her share and the share you left to him or her. Will the combined rate exceed the Nil Rate Band for IHT? If so there is an IHT problem which you should discuss further with us as the following advice in relation to care costs could be undesirable from an IHT mitigation point of view.
If the combined estates of you and your Partner do not exceed the Nil Rate Band then there should be no problem about IHT. There is however a further complication: “Pre-Owned Asset Tax” may apply.
Pre owned assets tax (POAT)
POAT came into effect on the 6th April, 2005 and may affect your choice of options.
If you simply retain assets such as your house in your own name until you die, they will be subject to IHT, if applicable when you die.
If you give away assets but retain a benefit such as giving away your house but continuing to live there ( gift with reservation of benefit) then you are treated for IHT purposes as if you still own the asset when you die. However, if IHT does not apply, then POAT may. Unlike IHT, POAT is not a tax on the capital value of the property. Instead, you pay an annual income tax charge based on the rental value, assuming a standard residential tenancy where the lease pays all rates and charges and the landlord handles repairs and insurance. It is unusual for tax proposals to be retrospective-however in this case, even if the benefit arose as long ago as 17th March 1986, if the benefit continues to arise after 5th April, 2005, POAT may apply. Please ask about POAT if you think that this may affect you. This can be properly considered as part of a broader review of your tax position by a specialist adviser.
Although not an exhaustive list of possible solutions, please find undernoted five options which may prevent the value of your home being taken into account in care cost assessments.
Option 1 Home Gift
Give your house to your children, retaining the right to live in the house. The date of a gift of a house is the date of registration of the disposition transferring ownership in the Land or Sasine Register. If an application for assistance with care cost is made within 6 months of the date of the transfer of assets, the assets may be clawed back or the recipient made liable for the cost of the givers care. If you have borrowed money from family to buy the house and this has been properly recorded, only the surplus of value over and above the surplus of the sums lent would be gifted. However, if you have a normal mortgage security over the property, other than an expired Discount Security to the Local Authority, a gift can be made subject to the security if the title is in the Sasine Register but this is not possible if the Title is in the Land Register. Generally speaking any title granted to a purchaser after 1985 in Glasgow and the West of Scotland, 1992 in West Lothian and 2000 in Midlothian, including Edinburgh, will be in the Land Register.
If the gift is made for other purposes and, particularly if the gift was made several years previously, it may not be taken into account for assessment of care costs. Please note that there is no particular length of time which must pass before the gift will not be taken into account for assessment of care costs.
This can be done in a number of ways, but the way which usually suits most people is
- A Disposition (transfer of ownership) of the property with a reservation of a liferent (keeping the right to live there for the rest of your life) and
- A Power of Attorney in favour of someone reliable, to enable the liferent to be given up in future if you no longer need it.
A number of other issues arise. If the house in which you live is owned by others, any one of the owners has he right to demand that the house be sold and the proceeds divided. They may not wish to do so but may be forced to do so in the event of personal bankruptcy or in the event of a divorce as the part owned may be taken into account in the divorce settlement or that share in the house may pass to someone else if the owner were to die. If the house is sold for whatever reason, capital gains tax may arise as the house is not the principal private residence of the owners of the house. All of these factors must be carefully considered before proceeding. Please ask abut Homegift for further information.
To protect your own right to occupy the house, it may be necessary to retain a Liferent or right to occupy the property rent free, IHT and POAT, if applicable, may make this unattractive. In addition, one of the effects of such an agreement may be to reinforce the impression that the gift was not in fact a genuine and outright gift but rather an attempt to avoid nursing home fees.
For recipients of a “Homegift” as described above, there are four potential problems. Firstly, the possibility that they may have to pay care costs or sell or mortgage the house to pay care costs or convey back the house if the DWP successfully establish that the transaction only took place to enable the giver to qualify and it was within 6 months before benefit was claimed. Secondly, there is a potential Capital Gains tax problem. Please ask about this if you think that this may affect your situation. Thirdly, if the gift is made within seven years of your date of death then the gift may be clawed back and included in any IHT calculation. Finally, if fair market rent is paid by you for your home if you continue to live in it after you have gifted it, then at the moment this would not be seen as a gift with reservation. However, it cannot be guaranteed that this will always be the case.
In summary, this option may work but it is not possible to know for certain until the assessment is being made. This can be a complicated exercise, especially if it involves Inheritance Tax Planning, but it is something that you have to do while you are well and in full possession of your faculties, the gift was not in fact a genuine and outright gift but rather an attempt to avoid nursing home fees. In summary this option may work but it is not possible to known for certain until the assessment is being made.
Option 2 Transfer of house to trust
A Discretionary Trust can be set up and the house transferred into the Trust during your lifetime. This puts ownership of the house beyond your own reach and therefore the asset does not belong to you. At the same time your own right to occupy the house is protected as the Trust will not become bankrupt, divorced or die. There are various other benefits from completing such trusts and these may include taking the property out of an assessment for care costs, therefore avoiding the need for it to be sold. However Capital Gains Tax may well arise on a future sale of the property and the local authority might seek to attack the arrangement as a ruse intended primarily to try to avoid nursing home fees as in 1. It is important to obtain tax advice prior to proceeding with a Discretionary Trust as depending on the value of the house at the date of entry to the Trust entrance charges could be payable and also ten yearly charges and exit charges may apply. Please ask about Discretionary Trusts if you think one may benefit you. IHT, CGT and POAT, if applicable, may make this unattractive.
Another option is that a Flexible Liferent Trust could be set up within your Will with your Partner being liferenter stating that on their death or other chosen period the asset passes to beneficiaries. Unlike in a lifetime trust if a liferent is created within your Will this is not subject to the entry charges etc. as above. Keeping this flexible can give greater scope for changes in tax laws etc. and will ensure that at least one half of the heritable property will pass to the beneficiaries should the surviving partner require to go into care. If the house is to be sold to meet care costs only one half will be available with the other half being held in the Trust until death of the Partner or some other such occasion as the testator may decide. Not only heritable property can be placed in the Trust you may also wish to place other capital into the Trust to provide income. The income would be taken into account for any assessment of means but the capital could still not be touched. There are tax issues to consider in this for IHT, CGT and income tax and further information can be provided if required as again your own personal circumstances would dictate whether or not any such taxes would apply.
Option 3 Lifetime Mortgage
Lifetime mortgage are becoming more common as a means of releasing funds prior to your death to supplement your income after retiral, to pay for luxuries such as cars or holidays or, to release funds to be gifted to your children. Lifetime mortgages are particularly popular with individuals whose wealth is mainly tied up in their home but who do not wish to sell their property. There are various schemes available, all of which are designed to enable you to continue living in your own home without having to pay mortgage interest and at the same time to release monies early. As this is a commercial transaction, it is unlikely to be attacked as depriving you of your own assets in order to qualify for assistance with care costs.
As always there are disadvantages. When the house is sold part or all of the proceeds will be payable to the lender and therefore will not pass to your children or be available to you.
On the other hand the money released by the lifetime mortgage is immediately available can be spent or gifted so long as the purpose of any such gifts is not to reduce your assets and qualify for assistance with care costs. This option should work to diminish the assessment.
Option 4 Immediate Care Annuity (Care Bonds)
Another possible option is to take out insurance to cover the cost of your care. In the event of you going into a nursing home then your insurance would pay a regular stream of income for the rest of your life offsetting the cost of care and meaning that no assessment of your means needs to be carried out. The premium on such insurance can be paid as a lump sum at the point of entering care. The premiums are, of course, dependant upon the age and state of health of the applicant. For an older person in poor health this option could be particularly cost effective. A combination of taking out a lifetime mortgage and using some of the funds released for a care bond would mean that a large part or indeed an entire part of the surplus could immediately be released to your family.
An immediate needs annuity policy can be purchased where an elderly relative is already in a residential care or a nursing care home or is about to be admitted. The annuity is paid directly to the care provider for the life of the individual and the Inland Revenue has agreed for this to be paid gross (no tax on the income). An alternative to an immediate needs annuity is a Purchase Life Annuity where the income is paid to the individual and is partially taxed. This is more suitable for people who are in good health and living in their own homes and are looking for a higher guaranteed rate of return from their capital than bank interest to supplement their income.
The Inland Revenue have stated that the amount payable by the annuity can only be equal to or less than the actual charge made by the care home, that their cannot be a surplus to the estate, should their be a reduction in the homecare fees charged or in the unlikely event that the individual returns to their home to look after themselves.
The usual method of purchase is single lump sum payment in exchange for an income to cover all or part of the costs of long term care for the life of the individual. It is also possible to have different options depending on the circumstances and assets where the immediate needs annuity can be deferred. Other features that can be added to the annuity are escalation rates and capital protection. Escalation Attached Annuity means that the income paid to the care home rises by a 6% each year and protects the income against inflation, rates can be chosen between 1% and 5% of escalation. Capital Protection allows the original capital to be detected in the event of the early death of the individual. The percentage of capital to be protected, up to usually 75%, would be returned to the estate less all income paid to the care home. This option would increase the capital cost of the immediate needs.
Option 5 Making a \'deferred payments agreement\' with your local council
The local council may make a Deferred payments agreement with you. If you don’t have enough capital (other than your home) or income to pay your care home fees and are liable to pay all your care home fees because your home has been counted as capital to avoid having to sell your home during your lifetime to pay your care home fees you may wish to ask the local council to defer payment. A deferred payments agreement means that the local council calculates what you should pay towards care home fees on the basis that your home isn’t counted as capital. The Council keeps a record of the difference between this amount and what you would have to pay if your home was counted as capital. You’ll still owe this amount but it will only be collected at a date you choose or when you die. The Council will collect what you owe from the amount received for selling your home or from whoever inherits your property.
There is no easy solution and any action should not be taken lightly. Death and taxes are part of life but carefully consideration taking account of your own personal circumstances and if necessary professional financial advice could ensure that in so far as possible any estate you own is passed to your beneficiaries in an efficient manner.
For further information please contact us and we will be happy to discuss further any item on which you are unsure or wish clarification and if necessary can pass your details to an appropriately qualified FA or Tax advisor to assist further as the information currently provided should not be taken as financial or tax planning advise as this note has not been tailored for your own personal circumstances.