01/09/2023
ADVICE ON HOW TO PROTECT AGAINST CARE HOME FEES
When someone enters care, they are subject to automatic means testing and ALL your assets, including your home, are considered. Only those who have very few assets will be able to avoid the costs of care. So, what can be done?
Transferring property to your children could be viewed as an attempt to hide property wealth to avoid paying for care. If this is deemed to be the case, the local authority can apply to reverse the transfer of ownership.
If you were to make an outright gift of the house to your child it would be treated as a “potentially exempt transfer” (or PET) for the purposes of inheritance tax (IHT) and if you were to die within seven years of gifting the property, then the property would fall back into your estate for IHT purposes and your property reverts back to an asset which may be subject to IHT.
If you survive for seven years after making the gift, there will be no IHT to pay. That said, having given the property as an outright gift, this means you are giving up any right to receive rental income or a share in the proceeds.
If you sign over your house but stay in the property, this will then be treated as a “gift with reservation of benefit” (GWROB). This means you reserve the right to benefit from the property. According to tax rules, the house will then remain part of your estate on your death, even if you live for more than seven years.
One way to get around this is by paying rent to your children, but you will have to pay the market rate attracted by similar local rental properties, in order to take it out of the IHT net. You also need to bear in mind that your children will then be liable for income tax on the rent you pay them.
Once you have signed over your property to your children, it will be counted among their assets, so even if you intend to go on living there, you will no longer be the legal owner and in a worst-case scenario, this means that if you fall out with your children, you could be evicted. Equally, you could be forced out if your children decide they want to rent or sell the property – or live there themselves. You will have no control over this, and your children will be able to make a decision without seeking your permission.
Risk from outside parties
If you sign over your home, you need to consider the possibility that your child may divorce. If this happens, they may be forced to sell and your son or daughter’s ex-spouse would have a legitimate claim against their estate which would also include your property.
If your son or daughter had an issue with bankruptcy, the property will form part of their estate. This could then potentially be claimed by creditors seeking to recover money from their estate.
These are all things you need to bear in mind before making any decision on signing your home over to someone else.
Capital Gains Tax
Before gifting your property, you also need to think about other charges, such as capital gains tax (CGT).
CGT applies where a property is not your main property. This could apply if, for example, your child is not living in the property when it is transferred into their name but has increased in value when they come to sell it.
Equally, if you are giving away a second home or holiday home, then you may be liable to pay CGT on any increase in value that has resulted between first owning it and giving it away.
Be aware of the rules on “gifts with reservation of benefit”
As a parent, you need to be think very carefully before passing your property on to your children as the council could view this as “deliberate deprivation of assets” to avoid residential care home fees.
Put simply, transferring property to your children in this way may be seen as an attempt to conceal property wealth to avoid paying for care. If this is considered to be the case, the local authority can seek to reverse the transfer of ownership. This means the home reverts back to the parents and will be included in the test for funding.
What happens if you outlive your children?
If you outlive your children, you need to be aware that the property will be passed on to their beneficiaries, so if they have their own children, they may inherit your property.
A few alternatives
Give away your home and move out
If you gift your home to your children and move out, you are permitted to make social visits and stay for short periods without affecting the seven-year rule on IHT.
Consider selling your home and giving your children the proceeds
If you sell your home, you could then gift the proceeds from the sale to your son or daughter. However, you must still survive for seven years this gift before the money falls outside of your estate for IHT purposes, subject to taper relief.
Taper Relief
Gifts given in the three years before your death are taxed at 40%.
Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.
Years between gift and deathRate of tax on the gift
3 to 4 years - 32%
4 to 5 years - 24%
5 to 6 years - 16%
6 to 7 years - 8%
7 or more - 0%
Living Trust
Lifetime trusts are often known as property protection trusts or asset protection trusts. Unlike will trusts, which come into being on your death, lifetime trusts are established immediately. Your home is gifted to the trust, which allows you to carry on living in it.
A Will only becomes effective when you die and after the probate process. However, a Living Trust is effective while you are still alive. You can place many assets into a Living Trust, such as property, savings, and investments.
During your lifetime
Once the Trust has been created, you can use it to 'ring-fence' your assets. Most people will protect their home and their savings, leaving capital in their bank or other savings accounts for ongoing living expenses. Income from savings protected within the Trust can be paid directly into your bank account to supplement income from earnings or pensions.
Just like a safety deposit box, assets can be added and removed from the Trust during your lifetime. If you have large expenses that cannot be met out of normal income, like a new car, holiday, or house repairs, a suitable sum can be transferred to your bank account from the Trust.
You are named as the 'Principal Beneficiary' of the Trust and retain full control of the assets within the Trust while you are alive and have mental capacity. You are free to move home, or release equity from the Trust at any time.
As the Principal Beneficiary of the Trust, you have a guaranteed right to live in the property for the remainder of your life. The Trustees, usually your children, cannot evict you under any circumstances.
You can instruct the Trustees to sell the property and to buy a new property of your choice. If the new property you are acquiring is more expensive, the Trustees can only be required to buy the new property if the additional funds needed is paid into the Trust by you.
The Trust is equally applicable to married couples and to single people.
If you lose mental capacity
If you lose mental capacity, the law states that you are no longer allowed to manage your own affairs. Assets held within the Trust will then be managed by your Trustees on your behalf. Your Trustees can effectively 'stand in your shoes' to make decisions on your behalf but these must be for your benefit. They are able to add or remove assets or use the income from the Trust to help you and improve the quality of your life. Assets held outside of the Trust will fall under the control of the courts. Creating a Lasting Power of Attorney whilst you still have the mental capacity to do so, will allow the people you choose to manage the assets that you own outside of the Trust.
After your death
After your death, the Trust continues to work to protect your assets for your beneficiaries. The Trust can continue to retain the assets safely within it or pay them out to the specified beneficiaries. The Trust is extremely flexible after your death and has the potential to continue protecting your family for 125 years from the date it was created. That means that all of the benefits described in this document can not only protect you and your children but can also protect your grandchildren and great-grandchildren.
For further information on any of the issues raised here, please call and speak to our Head of Private Client, Mr. Raymond Mann or send him an email at:
[email protected]
