Our article on deprivation of assets looks at how some types of gifts or trusts can be regarded as ‘deprivation of assets’. We also explain how you can legally and legitimately protect your share of the family assets from care fees. Additionally we look at the ‘7 year deprivation rule’ myth.
If you or your partner need care in later life and you are not entitled to NHS Continuing Healthcare funding, the Local Authority will usually conduct a means test to see if you can fund the cost of care yourself. If you have assets above £23,250, you will be expected to pay for the full cost of your care. If your assets are worth between £14,250 and £23,250, you will be expected to make a contribution to your care. Once your assets reach the lower £14,250 limit, the Local Authority will take over funding your care fees.
With this in mind, many people look for ways of reducing their assets prior to needing care.
At April King Legal we are often approached by prospective clients looking to reduce their assets during their lifetime so that their assets are not used up entirely on care fees, should they need care in the future.
They may be considering, for example:
- An all-out lump sum payment of cash to a child or grandchild
- A payment of a child or grandchild’s debt as a gift (e.g. paying off their mortgage)
- The transfer of a property to a child or grandchild e.g. their main residence or a holiday home
- The transfer of assets into trust which cannot be revoked
In fact, companies exist that will recommend transferring your property into an irrevocable ‘Lifetime Trust’ (also dubbed ‘Asset Protection Trusts‘ or ‘Lifetime Asset Trusts’) to avoid care fees. These companies claim that this is completely above board and will ensure your assets are protected from care fees. The risk here is that these actions may be regarded as deliberate or intentional ‘deprivation of assets’.
The key consideration here is the intention behind making the transfer. The Local Authority must consider:
- Whether avoiding the care and support charge was a significant motivation;
- The timing of the disposal of the asset. At the point the capital was disposed of could the person have a reasonable expectation of the need for care and support?; and
- Did the person have a reasonable expectation of needing to contribute to the cost of their eligible care needs?
If the Local Authority believes the asset was given away to ensure it was not included in a means test, it may decide that you have ‘notional capital’ of equivalent value to that of the asset. So what exactly does that mean?
Notional capital: an example
Let’s say you transfer the title to your house to your only son, and carry on living in it. Your house is worth £100,000 at the time of the transfer. This leaves you with assets of just £20,000.
Some time afterwards, you need care and the Local Authority performs a means test. They note that you have transferred your house to your son, and that its current value is £130,000. They decide that there is no reasonable explanation for you making this transfer, except for avoiding having to pay for care yourself. The Local Authority will therefore treat you as if your total capital is the current value of the house plus your remaining assets – i.e. £150,000 – even though you no longer technically own the property.
You will therefore be expected to pay for the full cost of your own care. The £20,000 you retained will be used in full initially (as you are deemed to have £150,000, not £20,000) but after this is gone, with the title transferred to your son, you won’t be able to sell your home. At this stage, the Local Authority have an obligation to provide care but they can seek recovery of the payment of care fees using debt recovery methods (see e.g Robertson v Fife  UKHL 35).
For the Local Authority to take action, they would need to show that your intention at the time of disposal was to exclude the property from means testing to avoid care fees. It is usually quite difficult to provide evidence of your intention and in absence of adequate evidence, the judge may reach the conclusion that the transfer was to avoid means testing.
Note that Yule v South Lanarkshire Council  1 CCLR 546 establishes there is no time limit on how far back Local Authorities can look when deciding whether a person has deliberately deprived themselves of assets to avoid residential care. So for example, if you transfer your home to your child or children when you are in your forties (although still fit and healthy) but continue to live in the property until your sixties (when you need care), there is a high risk the Local Authority will still regard this as deliberate deprivation of assets.
If a Local Authority decided to pursue a claim for care funding, you would have to challenge the decision – and would have the burden of proving that the Local Authority’s reasoning or decision was ‘so unreasonable or irrational that no reasonable person acting reasonably could have made it’ (known as ‘Wednesbury unreasonable’ – Associated Provincial Picture Houses Ltd v Wednesbury Corporation  1 KB233). This process can be lengthy and involve going through the Local Authority’s complaints procedure, Ombudsman procedures and ultimately court proceedings. It could be very stressful and very expensive.
The Care Act 2014 gives Local Authorities power to recover care fees from whoever you transferred your assets to.
In other words, if you transferred your home to your son, your son is liable to pay the Local Authority the difference between what it would have charged, had the transfer not been made. However, your son would not be liable to pay anything which exceeds the benefit they have received from the transfer. In other words, if your care fees came to £100,000 and your home was only worth £50,000, your son would only be liable for £50,000. If you transferred your home to three of your children, each would be liable for a third of the difference.
Local Authorities have the power to recover contributions towards care charges, taking into account any property that has been deliberately given away. They can pursue a claim in the County Court although this should be a last resort.
Once the debt for unpaid care fees reaches £750, they can alternatively start insolvency proceedings to declare you bankrupt. If you transferred your home within two years (or within five years if you were insolvent at the time of the transaction – which is unlikely), the transaction can be set aside. However, any gift can be set aside with no time limits (without bankruptcy) under the Insolvency Act if the Court believes that the transfer was made for the purpose of putting assets beyond the reach of a potential creditor or otherwise prejudicing the creditor’s interests.
The Court’s powers allow it to restore the position to that which it would have been had the gift not been made. In Derbyshire CC v Akrill  EWCA Civ 308 the Court considered specifically that these powers could be used where someone had transferred their house by deed of gift to their children, concluding that the section could apply where a person made the transfer for the purposes of putting the house beyond the reach of those who might have a claim in respect of the costs of their imminent residential care.
To date, few local authorities have used insolvency proceedings in this way – but with care funding stretched to the limit, we can expect an increasing number of cases going forward. There is also good evidence that families are put under a considerable amount of pressure to pay for care, even when a gift was genuinely innocent.
The myth of the 7 year rule
Many people hold the believe that if you transfer your assets and then survive for 7 years, this is not deliberate deprivation of assets. This so called ‘7 year rule’ is a complete myth. There is a 7 year rule that relates to inheritance tax but this is something different altogether.
The 7 year inheritance tax rule
If you gift something to another person and die within 7 years of making the gift, inheritance tax may be payable. This is tapered – so if you survive for less than 3 years the full 40% may be payable; 3-4 years = 32% , 4 to 5 years = 24%, 5 to 6 years = 16% and 6 – 7 years = 8%.
To be clear, the seven year inheritance tax rule is not related to deprivation of assets. As noted by the court in Yule v South Lanarkshire Council, the Local Authority can go back as far as they like when considering whether a gift transferred constitutes deliberate deprivation. Even a gift made 20 or 30 years ago could be considered.
Summary of risks
If you transfer assets during your lifetime, the main risks are:
- The person who receives your gift may die or run into financial difficulties. If you are still living in the property, you may find yourself homeless.
- The value of the assets you transferred may be still taken into account when performing a means test (“Notional capital” – see above).
- Your remaining assets may be used up entirely to pay for care (because you are deemed to still own the asset, even though you gave it away).
- Once your remaining assets are used up, the Local Authority can take enforcement action in respect of ongoing care fees. This might include action in the Magistrates Court, imposing a charge on the property (even though it is no longer in your name) or even reversing the transfer. This could be protracted, expensive and stressful.
- The Local Authority may choose to provide only a basic level of care, leaving you to fund the rest. The person who received your gift may not be willing to contribute. This can result in a breakdown of relationship between you and the person you gifted your property too. It can also mean you don’t get the level of care that you need.
- The person you gift the property to may lose their entitlement to benefits or services based on means testing.
Note also that if you transfer your home but continue to live in it, you will not avoid inheritance tax (if this is one of your intentions). This is known as a ‘gift with reservation of benefit’. Speak to us if you would like further advice about this.
Once again, this is not the same as making a Will that leaves your share of the family wealth to your partner for life, and then to your children. If your partner requires care after your death, this does protect your share from care fees and it would not be regarded as deprivation of assets.
The alternative: a solution that is completely legitimate and acceptable to the Local Authority
Couples who act now can protect their own share of assets from care home fees in a way that is completely legitimate and acceptable to the Local Authority. First, it is important to ascertain if the family home (and any other property) is held as Joint Tenants or Tenants in Common. If the home is held as Joint Tenants, each person owns a 100% indivisible share. When one dies, the other continues to own 100% of the property. If however the property is held as Tenants in Common, each person owns a divisible share of the property (e.g. 50%) which they can leave to whoever they like. If the couple owns the property as Joint Tenants, it is possible to sever the tenancy so that it is instead held as Tenants in Common.
The couple should then revise their Will so that each leaves their share of the property on trust to the other for life. After the first person dies, the surviving spouse or civil partner will have full use of the property for life. They can even move home with the permission of the trustees. Should they need care, the deceased partner’s share will not be taken into account for means testing. This is because they do not own the share outright – they only have a life interest.
A further key point of the above solution is that it is extremely affordable. To find out more, order our free information pack.