Care Home Fees and Trusts – When not to trust a trust
Relevant to: Keeping it in the family: inheritance tax and trusts; Life assurance as part of your total plan
When not to trust a trust. For most of us our house represents our main asset, the result of a lifetime of labour and love; and inflation. The prospect of losing the family home for any reason, for instance to pay the inheritance tax bill, has produced many schemes designed to remove the asset from the reach of the taxman, most of them ineffective.
But now there is a new threat. Many of us may need long-term care in our declining years, and care has always been a means tested benefit, but means tested in such a draconian way as to make HMRC’s Inheritance Tax look almost benign.
If you need to go into local authority care, they will assess your entitlement to any financial assistance. Under current rules if you live in England or Northern Ireland and your total assets — including the value of your house — are over £23,250, you do not qualify for the benefit and will have to pay in full for your care. They are not required to pay for all your care until you have less than £14,250. These figures are slightly higher in Wales and Scotland.
Since nowhere in the country can a habitable house be bought for less than this, it is clear the house will have to be sold sooner or later. This has spawned a new industry marketing schemes designed to shelter assets away from the grasp of the local authority.
But just as HMRC have always been able to seize assets “put in the wife’s name” if the purpose of such a transaction has been tax avoidance, so local authorities have the power to take the value of any assets into account which have been transferred elsewhere with the main purpose of avoiding them being assessed for benefit entitlement. It is known as deliberate deprivation.
There are ways of removing your assets from the watchful eyes of the authorities, but they require planning, and in some cases can come back to bite.
In the first instance you must consider one choice: if you are resigned to needing to go into a residential care home, will it be local authority care, or would you want it to be private? If private care is your preferred choice, then paying for it from your existing income may be feasible, supplemented either by selling the home and investing the proceeds for income, or renting the house out. An alternative solution might be to release some equity, enabling you to return to the property later or at least maintaining the potential to keep it in the family.
Those planning in advance for the worst case scenario may purchase a care fees annuity, or “immediate” annuity. These assure a continuing amount will be paid however long care is needed, and can be increased by RPI or fixed amounts as needed. But they require a one off purchase, and there are only a couple of providers in the market. Annuity payments are not subject to tax if paid directly to the care provider.
There is then a hybrid situation where you can qualify for local authority funding for care, but actually reside somewhere that suits you better if you can pay the difference. This “top-up” method only works if family foot the bill, since by definition you will not qualify for local authority funding if you have assets above the limit.
As an alternative to requiring you to sell your house immediately, local authorities can instead take a charge on your house to cover the costs of care, an equity release of sorts. They are paid when the estate is sold, including interest. But there are increasing concerns that cash strapped authorities are paying out more for care and deferring payment to a point that they will become overstretched. The increasingly ageing population could soon be making demands that the local authorities just can’t meet.
But in an age of austerity it is natural to want to maximise what you can keep for a rainy day, quite apart from natural resentment by those who have led a thrifty life with the primary goal of passing something on to the next generation, and are now faced with losing some or possibly all of it, while others who have adopted a less conscientious — or less socially moral — lifestyle and spent everything as they go will have their costs covered by the state.
It doesn’t seem fair. But on the other hand, why should low earning tax-payers be contributing to the care costs of someone who actually has the means to pay for it? They may feel they are paying to maintain someone else’s inheritance. Long-term care on the scale now increasingly the norm, at home or residential, was never part of the NHS plans for which we have paid our national insurance contributions, despite the promise of support from “cradle to grave”.
Both political parties have long recognised the problem and established the Dilnot commission to recommend how to resolve it.
The latest proposals are that
• the threshold at which assets will be considered should be raised to £123,000, and
• the total amount that any individual will have to pay will be capped at £75,000.
But as ever the devil is in the detail. The £123,000 turns out to be an upper limit of a sliding scale. The bottom end is likely to be £17,500, so if you had £100,000 in assets then you would still have to pay some £300 per week. And the £75,000 cap applies only to the care element, and not to the residency component of a care home’s charges.
These changes are not scheduled to come into effect before 2017, and are intended to be covered by not increasing the IHT allowance beyond the £325,000 level where it has been for some years. The government hopes that the life assurance industry will rise to the challenge of writing policies to cover the individual’s cash needs, but until the scheme is up and running, anyone owning a home and contemplating residential care will be worried.
These concerns have presented an opportunity for others. Some eager accountants and lawyers claim that transferring the assets into a trust is a strategy which will work to keep them in the family. Some even market their services as “how to avoid care home costs”.
Accountants and lawyers are duty bound to tell you if their schemes are even crossing the intent of the law, but these neatly presented package solutions fail to point out the potential pitfalls.
The problem was revealed as long ago as 2011 by a BBC investigation into a trust package provider which made it quite clear that if a local authority can deny benefit entitlement if it believes that a trust was set up with the intent of depriving assets from assessment, then marketing it as “how to avoid care home costs” almost by definition defeats the purpose of the exercise. The local authority may be able to challenge its validity based solely on the company through which it was set up by or purchased. They can simply disregard the “fiction” of the trust if they deem that you have deliberately undertaken that approach in order to avoid paying for care.
For example, if your move into care is imminent, and you transfer your assets into a trust, you will be deemed to have deliberately hidden them from the assessment, and the authority will include them regardless. They must conclude that the intention to avoid charges must be a significant part of the reason for establishing the trust.
Power to recover
The National and Social Services Social Security Adjustments Act 1983 states that if deprivation occurred in the last 6 months it can recover sums paid out, but authorities have powers beyond that. If they believe that your financial position has been deliberately created to avoid depriving assets from assessment — for example by giving assets away to children — the insolvency laws allow them to look back even further, even beyond the IHT seven year rule.
On the other hand, if as part of prudent planning for your family the assets are in trust, and have been for some time, then they are most likely safe from assessment. History and intent are important. There is case law that supports both sides of the argument. One consideration is that the strategy or action has no IHT benefit, then it could be considered as deliberate deprivation.
And setting up a trust is not cheap. A simple one might cost less than £1,200, though the ones being aggressively marketed to avoid home care fees charge £3,000 or more.
Trusts tend to be seen by HMRC as tax avoidance, and so can have certain immediate tax implications too. Assets such as houses can be transferred in, but shares, including those in ISAs, have to be either sold and repurchased within the trust, or the balance left as cash to be used for other income generation. And if the sum of the asset being put in trust exceeds the IHT limit, currently £325,000, then an immediate tax liability of 20% becomes due. There will be ongoing charges for accountancy and the services of the trustees, and every ten-years an “anniversary” charge is due, a further tax payment up to a maximum of 6% of the value of the trust over the nil rate band. Your trust is subject to income tax too, at different rates for dividends or other income.
“Settling” assets into trust is also subject to the same rules on gifts, in that they are still subject to a tapering rate of inheritance tax if the donor dies within seven years. And any amounts paid out of the trust will also be subject to tax.
But the inclusion of the family home in any assessment of means is not automatic. If for example, your spouse, partner or relative aged over 60 still lives there, then the value cannot be included. Changing the way the assets are owned from joint tenants to tenants in common will also make it impossible for the local authority to claim that your proportion of the value of the home should be taken into consideration: it is as simple as sending a Deed of Severance to the land registry. In addition the property cannot be sold so long as there is another part owner. The proportions of the home owned by each need not be equal. In this way parts of the home could be left to children in trust, or directly and still keeping under the IHT threshold. Changing ownership from joint to common tenancy requires making a will, since “survivorship” — the automatic transfer of jointly owned assets — does not apply with common tenancies.
But trusts can cause some problems. Remember that if a tenancy in common is transferred to a trust, the surviving partner cannot sell or move without getting the permission of the trustees, who may not judge it in the other’s interest. And any capital gain on the house since it was put into the trust will be taxable at the trust’s capital gains tax rate.
In many situations setting up a trust can make sense, and should not be over complicated or expensive. It should however always be done by an expert with knowledge of your individual circumstances.
There is help available from several reliable websites, Saga, and Which? HMRC has explanations of the tax situation but it is complex even for professionals and depends on many variables.
The concerns over protecting family assets are real. And some people are being tempted to undertake increasingly dubious steps to try to ensure that what has been carefully accumulated over a lifetime does get passed on as planned. But your solicitor and/or accountant will be best placed to advise you, and normally for a fee much less than £3,000. A trust may well be the best thing for your circumstances, but such a significant strategy must warrant the use a professional.
For tax and trusts advice contact Jeff Parr at Chesapeake Associates. Email firstname.lastname@example.org