Care Act 2014
Under the 1990 Community Care Act, if a person is taken into care the local council can use the value of the house owned by the person in care to fund his or her own care. A Local Authority cannot usually force the resident to sell their house, but this only delays the inevitable – when the resident eventually dies and the property is then sold by the executors the legal charge which would have been placed over the house by the Local Authority to cover care fees is then satisfied from the ultimate sale value of the property.
This is if you have assets of over £23,250.00 and this includes any savings you might have as well as your home! This could mean that when the person dies there could be very little of their estate to be transferred on to their family.
It is illegal to deliberately avoid paying these fees by simply giving the property away if the prime motive is to avoid paying long-term care costs. However, it is not illegal if both spouses make a provision in their Will where special arrangements are made with their property called “severing the tenancy” so that they give their half of the property into a trust ultimately for children or other family members at the first death. This half of the property is then safeguarded for the family making sure that at least some of the estate is passed on to the children and is not available for the Local Authority to include as part of the resident’s assessment for the payment of their care home fees. This simple technique prevents the house transferring to the surviving spouse as would normally happen.
Property Protection Trust (Settler Interested Trust)
Homes being taken for long term care fees is a real and growing problem with over 200 homes a day being taken by local authorities to fund care. Care fees can be easily in excess of £36,000.00 pa and costs are rising well in excess of the rate of inflation.
The Property Protection Trust (PPT) is an irrevocable discretionary trust which has been specifically designed to place your home into trust to facilitate probate. Constructed for the benefit of ease of probate, the Trust takes ownership of the property and the residents are called Settlers.
The Trust is managed by the Trustees you choose, to look after the Trust during your lifetime.
On death of the settlers, the Trust is dissolved and the property disposed of as per the terms of the Trust.
The benefits of the Trust is that it does not form part of the settlers assets and so does not form part of any means testing, say for residential care purposes. The Trust once dissolved and the property put up for sale, will attract Capital Gain Tax (CGT) and therefore proper advice on addressing this needs to be taken from us.
We also recommend that a Lasting Power of Attorney (LPA) is taken out at the same time to further protect the Trust should a settler go into long term care and the local authority look to their savings to pay for the care. Should the settler not have the capacity to act for themselves, the Local Authorities will look to Bankruptcy proceedings to access the settlers funds and attempt to set aside the PPT; the LPA will circumvent this action.
Disabled Discretionary Trusts
Families who have a relative with a learning disability often use a Disabled Discretionary Trust. These trusts are a way of putting in place financial arrangements to help support the disabled relative.
A Disabled Discretionary Trust can also provide a way of owning a property. Sometimes families decide that in the long-term they would like to be able to set up arrangements that allow their relative to continue to live at home with the necessary support.
Disabled Discretionary Trusts are used:
- As a way of paying for the things the statutory services may not be able to give, for example a holiday, new clothing or even additional care.
- As a means of owning, managing and maintaining a property.
- As a way of arranging an inheritance.
- So there is a way of managing money or other assets.
- To avoid benefits and care funding being stopped.
Although Disability Living Allowance is not means tested, Income Support and possibly other benefits such as Housing Benefit stop being paid altogether if a person has more than a certain amount of money held in their name (currently £16,000.00). Benefits are withdrawn or reduced if savings exceed a lower level.
If Social Services fund a residential care place or care package they may also begin to charge for the care service or stop funding it if an individual holds more than £22,250.00 (This would of course include the property passed to them in your estate) In these circumstances they may not get any financial assistance.
Once assets are put into the Disabled Discretionary Trust they belong to the Trust, not the person intended to benefit. He or she may receive gifts or even payments from the Trust but they cannot be said to have any rights to the assets themselves, since there are always a number of other potential beneficiaries who could, at least in theory, benefit from the trust. Another way of looking at this is that any Authority assessing the finances of the person can’t see the contents of the trust as being owned by the person, since the person has no rights to the trust fund and the trust fund could be gifted to any of the other beneficiaries.
Trusts hold and invest assets. This can include the family home. It may provide a means of managing and maintaining a property. This is particularly useful when the person lacks legal capacity i.e. sufficient understanding to enter into a contract. Trusts are normally set up as part of drawing up a Will.
Trustees will operate the trust. These can be other family members, friends or professionals. Key points about the Disabled Discretionary Trust are:
- Trustees have discretion as to how the assets are used and the trustees are free to make all of the decisions
- The person to benefit from the Trust must not have a right to the income or capital
- The intended beneficiary must not be the only person named in the Trust i.e. must not be the 'sole' beneficiary
Without these features the Disabled Discretionary Trust is not properly constituted and the person may be treated as though they own the house or have the money.
It is important not to leave a disabled child out of a Will as the Will may be contested by Social Services under the Inheritance (Provision for Family & Dependents) Act 1975. As noted above if a direct gift is made the beneficiary may well not be able to administer the funds and the injection of cash is likely to harm benefits, which might otherwise have been fully available.
Disabled Discretionary Trusts also enjoy privileged tax treatment when compared to normal Discretionary Trusts and as such are not subject to 6% periodic & exit charges.
Nil Rate Band Discretionary Trust
The nil rate band discretionary trust can still be used as a useful IHT saving tool within a Will especially for couples not married and not Civil Partners.
Nil Rate Band tax planning used to be commonly used by married couples to reduce IHT liabilities on the event of the second to die.
Examples (The Old System)
Mr & Mrs B were married and owned a property jointly, valued at £500,000.00. They had £100,000.00 in other assets. Assumed NRB is £250,000.00. Each owned a 50% share of the assets i.e. £300,000.00 each. Mr B died leaving everything to his wife. £300,000.00 was therefore transferred to the estate of Mrs B giving her an estate of £600,000.00. On Mr B’s death there was no IHT to pay as Mrs B was an exempt beneficiary.
Mrs B died some years later and left her entire estate to her two children. The then current NRB was £285,000.00. As the children were non-exempt beneficiaries the IHT Bill was as follows: -
Value of Estate - £600,000.00
Minus NRB - £285,000.00
Subject to IHT @ 40% - £315,000.00
IHT Bill - £126,000.00
To reduce the IHT Bill the clients could have set up what is known as a nil rate band discretionary trust within their Wills. To achieve this the property tenancy would have been ‘severed’ from joint tenancy to tenants in common. Each could have then left their share of the property within the Will trust with the children & spouse as potential beneficiaries.
So on Mr B’s death £250,000.00 will have passed into the trust with no IHT due as within the Nil Rate Band. The remaining £50,000.00 would pass to Mrs B. Technically the trustees would then transfer full ownership of the property to Mrs B in exchange for a promise to pay back the value of the trust fund on her death. This would be either by Mrs B providing a loan / IOU note or alternatively a charge being placed by the trustees on the value of the property.
On death Mrs B’s estate will have been £350,000.00.
Plus £250,000.00 representing the value of property transferred.
Minus £250,000.00 charge in favour of the trust
Net Estate - £350,000.00
Minus NRB - £285,000.00
Subject to IHT @ 40% - £65,000.00
IHT Bill - £26,000.00
As you aware, any unused percentage of the NRB can now be transferred from a deceased spouse to the surviving spouse. In effect this gives rise to a current married IHT NRB allowance of £650,000.00. The effect of being able to transfer the unused allowance is that NRBDTs have lost some of their attraction to married couples (or those in Civil Partnerships). However, couples who are neither married nor in Civil Partnerships cannot pass on any unused NRB allowance. Therefore clients falling into this category should still consider the use of NRBDTs within their Wills as the current IHT saving could be as much as £130,000.00.
However, there are compelling reasons why married couples should still consider these types of trusts, especially when one considers that with sound investment strategies the trustees of the trust can invest the fund and manage the relatively modest tax bill of 6% every 10 years. If the first to die left everything to the survivor, who then similarly invested their inheritance then whatever would be over 2x the nil rate band would be taxable at 40%.
As one of the most experienced and qualified financial planners working in the later life market today, Clive has chosen to specialise in advice and guidance for the over 55s. In particular he can advise on:
- Investment, particularly to protect capital and income from inflation.
- Inheritance Tax mitigation.
- Care fees planning.