By Stewart Stretton-Hill, senior associate in the Tax, Trusts and Estates team at Irwin Mitchell
Dementia isn't a natural part of ageing but one in 14 people over the age of 65 are living with dementia and it's estimated that one in three people born this year will go on to develop dementia.
The total cost of care for an individual living with dementia may be £100,000 and in some cases as much as £500,000. 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 will 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'm often approached by clients who want to give their home to their children. Unfortunately, this can be a disaster without proper planning.
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. It 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 could end up in the hands of your in-laws or completely unknown third parties.
Increased tax liability
Giving your property to your children probably will not 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 seven years it will not be taxed in your estate. However, this rule doesn't apply if you still live in the property you've given away. Instead HMRC will include the value of the property in your estate at death (called a “gift with reservation of benefit”, GROB for short).
This might seem that you are in no worse position than if you still owned the property, however, because the property isn't passing under your Will it wouldn't benefit from spouse exemption (if you have 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 Will.
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'll 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 are 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 at present.
If you're worried, you should talk to a legal professional about your situation so you can see what options are available to you and your loved ones.
- Take financial advice
- Save up, where possible, to create a ‘care funding pot’
- Review your Will often
- 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.