Deprivation of assets for long term care
Anyone undertaking financial planning for clients who are likely to require long term care, either in the immediate or foreseeable future, will be aware of the powers of local authorities to claim 'deprivation of assets'; also known as 'deliberate deprivation'.
In summary, deprivation of assets occurs when someone gives away (or sells off cheaply) assets, income or capital in order to qualify for State-funded care support from the local authority which they wouldn't otherwise have been entitled to.
In the 2012/13 tax year, clients in England with assets of less than £14,250 and limited incomes will qualify for full State-funded care. If their assets are between £14,250 and £23,250, a 'tariff income' will apply, giving them a graduated level of State-funded assistance.
In financial planning terms, this is incredibly difficult to manage. Does this mean that a couple in their seventies for whom you have advised to gift a sum of capital to their children, could be denied local authority help if they needed to go into care in five years' time?
In all cases, it depends on the circumstances. For any clients needing long term care, the local authority must be able to demonstrate a significant motive by the client to try and qualify for State-funded care by giving away their assets. However, these significant motives are not as hard to prove as you may think. Let's look at an example:
Yule vs. South Lanarkshire Council (1999)
In this particular example a 79 year old lady decided to transfer the ownership of her home to her grand-daughter, but retained a life interest in it. A year later, she had a fall and was subsequently admitted into a nursing home four months later. The local council claimed that deliberate deprivation had taken place in order to qualify for State-funded care.
The courts found in favour of the council. This is because there was no clear reason why the property had been left to the grand-daughter during the defendant's lifetime, rather than on her death. Although it wasn't a clear-cut case of deliberate deprivation, there was no other substantiated reason for the property transfer - therefore the courts held that the council were entitled to infer a motive, given the circumstances.
Local Authority - Rights & Exemptions
Although every case needs to be looked at in isolation, there are a few things to be aware of in financial planning for clients who may require long term care in the future:
- If a client transfers capital to someone else within six months of needing care, the local authority has the power to recover those assets directly from the recipient - or to treat it as capital that the client never gave away in the first place (i.e. notional capital).
- If the client disposes of the capital more than six months before needing care, the local authority can still treat it as notional capital, depending upon the motive of the person who gave it away. The authorities cannot physically recover the assets from the recipient after this point, but they do still have a legal right to recover from the donor.
- The client's home may also be regarded as 'capital' by the local authorities in some circumstances, which may also preclude them from receiving any State assistance.
However, there are some situations where the client's home would normally be disregarded, such as:
- Where the care is only expected to be temporary
- Where the client's spouse/civil partner is over 60 and lives in the property
There are also a few other exceptions of capital and income which are disregarded by the local authorities, which are:
- Initial (but not ongoing) payments from a personal injury claim
- The surrender value of a life policy
- If the client is a potential beneficiary under a discretionary trust
- The mobility element of Disability Living Allowance
- Income from mortgage protection policies
- Annuity income from a lifetime mortgage
- A limited amount of Pension Savings Credit
- Personal Expenses Allowances of £23.50 per week (i.e. for toiletries)
The benefits of investment bonds in financial planning terms are well known, particularly because any regular withdrawals of up to 5% of the original investment amount are deemed as a return of capital, rather than as taxable income.
However, it is not the case that investment bonds can be used to fully shelter a client from deliberate deprivation. Under the tariff income calculation, any money which a client draws from investment bonds will still be regarded as income, and fully taken into account in the calculation for State assistance. This is irrespective of the fact that bond withdrawals are technically a return of capital.
The good news
Whilst the deliberate deprivation rules can be quite penal for those clients with modest capital or income, there are some planning areas which do still seem to be acceptable to the authorities:
- IHT planning. For clients with significant assets, the need to dispose of assets for reducing IHT can be clearly demonstrated and proven.
- Individuals gifting physical items such as family jewelry to their children prior to entering care are also unlikely to be caught by these rules.
- Private or occupational pension income which is paid to the client may be partially disregarded if they have a spouse or civil partner that doesn't live with them, but is still financially dependent upon them.
Top Planning Tips
Taking into account the above points, the following tips may help to reduce the risk of deliberate deprivation in financial planning terms:
- With IHT planning, the earlier this process is started, the better. This is because it establishes a regular pattern of gifting and is something which becomes a 'normal and expected activity' by the client.
- Clearly document why you are recommending that the asset/capital/income be given away, and make sure this is communicated in your report to the client - this will establish the motive for reducing their wealth and may help their case if challenged at a later date.
- Be wary of advising clients to make sudden financial gifts to their immediate family, and particularly gifting away the family home while the client is still alive. Gifts of this nature are likely to be scrutinised very closely and are high risk for deliberate deprivation - particularly if the client is in their late seventies or above.
- The rules vary for clients in England, Northern Ireland, Scotland and Wales. Be sure to obtain full details of the local authority care funding position for clients based in the relevant specific region.
- Be aware of the fact that local authorities largely have their own jurisdiction when it comes to investigating cases. Although they all follow high-level guidelines, the treatment of cases will differ from one part of the country to another. For example, local authorities with lower financial resources may scrutinise and challenge cases in more detail than authorities with greater resources.
Ultimately, the best solution is for those clients who have sufficient means, to self-fund their care. Not only will this give them greater choice over what care they receive (and where), but also provides significant peace of mind for their families that the care costs have been largely taken care of. Especially given the significant cost involved.
It is a shame that the long term care market in financial planning has reduced so significantly, but there are still some excellent products available to your clients which are well worth looking at, and form an often more palatable solution to clients than equity release.