By Stewart Stretton-Hill, Tax, Trust & Estate Senior Associate at Irwin Mitchell
Dementia is not a natural part of ageing but 1 in 14 people over the age of 65 are living with dementia and it’s estimated that 1 in 3 people born this year will go on to develop dementia according to Alzheimer’s Research UK.
The total cost of care for an individual living with dementia may be £100,000 and in some cases as much as £500,000 based on statistics from the Alzheimer’s Society. People living with dementia often have few other health needs so the duty to provide the care the person needs falls on the local authority.
Local authority care is means tested and if you own more than £23,250 you’ll have to fund your care yourself. Most people want to protect their assets from being sold to pay for care. An obvious solution is to try to do some planning with the family home and I am often approached by clients who want to give their home to their children. But this can be a disaster for the following reasons:
- Loss of security
By handing over ownership of your property to your children you have no security. Your children are very unlikely to want to sell the property while you are still living in it but they may have no choice.
If your child gets divorced or is bankrupt the property is their asset and will be taken into account and may have to be sold to fund the divorce settlement or settle debts in the bankruptcy.
If your child dies before you the property will be part of their estate passing to their beneficiaries. It may end up in the hands of your in-laws or completely unknown third parties.
- Increased tax liability
Giving your property to your children probably won’t attract capital gains tax but this does depend on whether the property benefits from principle private residence relief.
The gift, however, could well be a disaster for inheritance tax. Generally, if you survive a gift by 7 years it won’t be taxed in your estate. However, this rule doesn’t apply if you still occupy the property you’ve given away. Instead the Revenue will include the value of the property in your estate at death (called a “gift with reservation of benefit” – GROB).
This might seem that you’re in no worse position than if you still owned the property, however, because the property is not passing under your Will it wouldn’t benefit from spouse exemption (if you’ve left your estate to your spouse). This may result in an unexpected tax liability on the first death, an impact on cash or specific legacies, and undo any planning you may have put in place in your Wills.
What about a trust?
Rather than giving the property outright to children, transferring the property to a trust is often suggested as a solution. While you wouldn’t lose control of or security in the property creating such a trust may be worse from a tax perspective.
If the value of the property put into trust is worth more than your available nil rate band you will face an immediate tax bill of 20% of the excess value. The trust will also suffer tax of up to 6% of the value over the nil rate band every 10 years. Plus the property will still be treated as a GROB.
Deprivation of capital
Finally, even if you’re happy with the risk and transfer your property, this may still be completely ineffective at protecting its value. Where the Local Authority can establish that a ‘significant operative purpose’ behind the transfer was to qualify for care fee funding they will treat the transfer as ‘deliberate deprivation of capital’ and assess you as owning the capital value.
What can be done to completely protect the family home?
While you, a spouse, or certain other individuals are living in the property it should be disregarded from the financial assessment. Spouses may be able to structure their Wills to help protect some of the property value but otherwise, sadly, very little can be done.
- Take financial advice
- Save up, where possible, to create a ‘care funding pot’
- Review your Will
- Consider what care you would like to receive if you are unable to look after yourself
- Make financial and health decisions Lasting Powers of Attorney
- Encourage your family to become ‘Dementia Friends so that they can understand how to help you live well if you develop dementia
- Above all, plan ahead.
If you’d like to discuss your own or a loved one’s later life planning, please do get in touch.