A couple of weeks ago, The Times featured an article by Ali Hussain entitled, ‘Giving your child a share of your house can backfire later’.
The article explained how some people are giving away their homes with the intention of avoiding care fees in the mistaken belief that the Local Authority will not take the value of the home into account when conducting a means test. Some also believe that gifting the home to their children means it won’t form part of their estate for Inheritance Tax purposes.
At April King Legal we have covered the subject of deprivation of assets quite extensively in our article ‘Deprivation of Assets – a guide’ but in light of the Times article and in particular, some of the comments underneath, some points need reiterating. The Times’ Article is correct for the most part, but does not explain the action that you can legitimately take.
Why do people gift property?
People gift property for a number of reasons. These might include:
- Making a saving on inheritance tax or other costs on death – they would need to survive for 7 years after making the gift for this to be effective. If they survive for less than 7 years, inheritance tax may still be due although this is tiered depending on when they die.
- Avoiding the need to sell their assets to pay for care fees – this may be classed as deprivation of assets. Note that the 7 year rule does not apply here – see below.
- Making themselves eligible for means tested benefits (or getting a higher level of benefits by reducing their assets)
- Reducing the burden of the asset (for example, a company, or a holiday let)
- Reducing the administrative burden on death
- A desire to help out a family member in times of financial need. For example,
- A gift to a grandchild of school fees
- A gift of money to an adult child to help them with a house deposit
- A gift of money to an adult child to help them pay expenses after losing their job
With regards to the last reason (helping out family members), the Local Authority will also take into account whether, at the time the gift was made, there was any possibility that care might be needed in the future. If one of the above gifts was made by someone who knew they would need residential care in the future, the Local Authority may still regard this as deprivation of assets.
Paying for care: the basic rules
If you have more than £23,250 in assets (including your home), you’ll be asked to pay the full cost of your own care.
If you have £14,250 – £23,250 of assets, you’ll be asked to pay a contribution towards your care.
If you have less than £14,250 of assets the Local Authority will pay for your care.
However, note that in many cases, people will still be asked to make a contribution. This is often charged as ‘extra services’ or requested because you (or your family) want to be in a particular nursing home which is more than the Local Authority’s budget.
If you are entitled to NHS Continuing Healthcare Funding, some or all of your care will be funded, regardless of your assets. NHS Continuing Healthcare Funding is available for those with severe care needs.
If you need to go into residential care and there will be someone occupying your home, you may not have to sell it. This applies if the person is:
- your partner or former partner, unless they are estranged from you
- your estranged or divorced partner IF they are also a lone parent
- a relative who is aged 60 or over
- a child of yours aged under 18
- a relative who is disabled.
If you are required to sell your home to pay for care but you do not want to, you may be able to defer paying for the cost of your care. This may mean that your estate pays the bill when you die, or could be a temporary arrangement to give you time to sell your home when you choose to do so.
What you should never do
You shouldn’t gift property to someone with the intention of avoiding care fees. If you do, the Local Authority may treat it as if you intentionally deprived yourself of assets that could be used to pay for care fees. They could treat the asset you gave away as ‘notional capital’ – i.e. they will perform a means test as if you still own the property. 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). They have wide powers and can also look to the recipient of the gift to pay for your care fees. See our article ‘Deprivation of Assets – a guide’ for a more in depth consideration of the action that a Local Authority might take.
Another thing you shouldn’t do is transfer your property into a so-called ‘Asset Protection Trust’, ‘Family Protection Trust’ or ‘Estate Preservation Trust’. There are quite a number of risks with this type of transaction, even if the companies peddling the concept tell you otherwise. These include that they are often run by non-lawyers with no real legal qualifications. In the past, some have been jailed for fraud. Transferring your property into one of these type of trusts may be regarded as deprivation of assets and once you transfer the property into the trust, you cannot get it back again. Look at the list of possible consequences below.
What you can legitimately do
The Times article does not mention the ways you can legitimately protect part of your estate from care fees.
If you own your home as joint tenants with your partner, you can sever the joint tenancy so it is owned as ‘joint tenants in equal shares’. You can each use your Wills to give the other a life interest in the property (we call these ‘Care Fee Trust Wills‘). When you die, your partner will own their share of the property but they will not own your share outright. If they need care, the Local Authority cannot take your share into account when performing a means test (and of course, this works in reverse if your partner dies first).
When your partner dies, your share of the property is left to who you choose and their share of the property is left to who they choose. Many of our clients at this stage will choose to create a Bloodline Trust using their Will, which protects the assets from predatory third parties. This allows, for example, their adult children to have full access to the funds – but should they get into financial difficulty or go through an unpleasant divorce, their creditors or ex partner will not be able to claim on their inheritance.
The ‘7 year rule’ does NOT apply to deprivation of assets
Many of us are familiar with the idea that if we make a gift within 7 years of our death, it may be subject to inheritance tax at a tiered rate.
However, it’s important to appreciate that if we gift property to someone in order to avoid care fees, there is no limit on how far back the Local Authority can look to decide if this was deprivation of assets (Yule v South Lanarkshire Council  1 CCLR 546).
This doesn’t mean every gift ever made will be considered as deprivation of assets. As noted above, sometimes there are genuine reasons for gifting your property. The Local Authority will look at all of the facts, including whether there was any anticipation that care would be needed in the future.
If you transfer assets during your lifetime, there are other risks besides the possibility that the asset may be taken into account when performing a means test:
- The person who receives your gift may die or run into financial difficulties. If they have debts, the property may be used to pay for those. If they get divorced, the property may become part of the divorce settlement. If you are still living in the property, you may find yourself homeless.
- 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.
- An outright gift of the home to someone other than the home occupier will have capital gains tax (CGT) implications. It will no longer be your principal private residence as required for CGT tax relief.
- If you style the transaction as a sale, Stamp Duty Land Tax may be payable.
- If you continue to live in the home, the person you gift the property to may see income tax implications (equivalent to the annual rental value, unless rent is paid for its continued use).
- 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’. There is an exception to this: if you inherit property and then use a Deed of Variation to immediately gift it away. In these circumstances, even if you continue to live in the property, there is no deemed reservation of benefit. However, gifting property that you need is an extremely risky strategy!
Get in touch
Speak to us about using your Will to protect your share of the property from care fees. Call 0800 788 0500 or email email@example.com.