One of my clients has asked for advice re his parent’s home. Basically he is worried that when one of them dies the other will have to go in to care and he is concerned that they will have to sell the family home to pay for care.
I have suggested that they could gift the house to my client and continue to live there as long as they want. I realise that for IHT purposes this will be treated as a gift with reservation but as the house is only worth about £200k and they have very few other assets they will be well below the IHT threshold.
Does anyone have experience of this? Could the council recover the costs of his parents care from my client?
We also discussed transferring the house into a trust. Would this be a better idea?
Replies (15)
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Has he thought about...
... paying to get them bumped off. It might work out cheaper for him. As long as he doesn't get found out he'll get his inheritance early too.
Have you seen this: http://www.firststopcareadvice.org.uk/downloads/resources/FS8%20-%20Deprivation%20of%20Assets.pdf
deprivation of assets
What you are suggesting would come within the definition of deprivation of assets. Essentially what that means is that you give away your assets in order to claim means tested benefits. If the council proves that you have done this in order to claim benefits then they will ignore the transaction. They can go back as far as they like, however, in practice they tend not to go further back than six months.
If the client transfers the house for other reasons other than to claim means tested benefits then this is not deprivation of assets. eg client wants to give house to daughter because she cares for them etc.
Without trying to worry you too much, I would also be vary wary about giving advice such as this because it is also classed as benefit fraud and is a criminal offence.
In practice this advice is given often and often law firms set up trusts to avoid means testing. However, their file notes will rarely indicate that this is the reason for the trust.
You are right though that the gift would be a GWROB for IHT and therefore ineffective.
A common way around the problem which I understand a few law firms are trying, sometimes successfully, is for both parents to sever the joint tenancy of the family home and gift their share of the home, either outright to son/daughter or via a trust via their will. Surviving parent now owns only 1/2 of home which I believe is deemed of nil value by some LAs.
oops cross post with poster above. Good link George.
I will leave mine as their is a bit more to think about.
also
Have you considered that if the house belongs to the client, if (s)he divorces/dies intestate before the parents/gets made bamkrupt/gets sued for a large sum, the parents could be put out of their home.
Sell the house
Why should you not use the funds from the sale to pay for your parents care? It is their money and they deserve to be looked after in their old age. Would you want them to do without so that you can have your inhertiance?
In which case, sell the house and YOU look after them.
Sorry, your clients, not you.
CGT
Suppose the property could be transferred to the client or to a trust of which he is a trustee without being regarded as a deprivation of assets, when the parents have both died will there not be a 28% CGT liability to pay on the sale of the house as the PPR exemption will have been lost?
There are several problems of the proposed arrangement, many of which are highlighted in the link which has been provided. Another problem is that if the donee himself has reliance on means tested benefits, then the asset of the house may be taken into consideration.
CGT is a problem if the house is given as an outright gift as PPR will be lost when the donee does not continue to occupy. However, if the gift is into a trust then the gift into the trust qualifies for PPR and also when it is in the trust, the house will qualify for PPR if a beneficiary under a trust occupies the property.(Sampson v Peay)
There is always home care for a few years before the fateful care home. This is relatively inexpensive and can be very beneficial.
Also, the house can always be rented to defray care home costs, whilst retaining its carrying value in the estate.
And, this is a very likely area for government policy changes and although planning ahead is usually sensible burning one's bridges is not to be encouraged. It is probably wise to do nothing with this one until the issues and options are clear.
Using a trust
We have recently acted for a cient that with solicitor's advice has transferred her property into a trust.
I believe there is no stamp duty and it is clearly not set up for IHT purposes. Just like the original post.
THe solicitors requsted a statement from the client's doctor as to capability to sign and to health. The latter to show it was not used to avoid potential care home fees. On his death the proceeds fall to the family.
THe trust is for the benfit of the setlor during his lifetime.
As mentioned above the CGT relierf for owner occupiers is retained if within a trust. It also distances the family if the Local Authority asks questions
But don't forget
If the parent were to die whilst still occupying the property, whether under a Trust (settlor-interested as outlined above) or otherwise, there will be a reservation of benefit; whilst apparently not an IHT issue in this case in light of values, nevertheless the CGT-free uplift on death will not be available. Unless the recipient(s) can themselves claim PPR, there will be a CGT charge on their eventual disposal based on the difference between the sale price and acquisition cost at the date of the gift.
Is the donee child currently living with his / her parents; if so, what about a gift of a proportionate share of the value of the property (subject to deprivation of assets and insolvency challenge considerations) to the child ? No reservation of benefit or POAT issues then arise as long as the child continues to share occupation of the property with his parents provided that the donor parents do not receive any benefits back in terms of meeting ongoing property outgoings.
If both parents are still alive you might consider severing any joint tenancy with appropriately drawn Wills establishing Trusts to ring-fence the value of the deceased's property share whilst still giving security of occupation solely for the survivor; at least this way one-half (or more depending on the respective property shares of the parents and the order of deaths) would be preserved without the deprivation of asset or insolvency challenge considerations applicable to lifetime gifting.
How would the non-cgt uplifdt be a problem? I could mistaken but the gain up to death wouth have the benefit of PPR unless it was not occupied for > three years.
Whilst a gift to a child is an idea it is only half the story. Based on ages at death most children will own his or her house.
If the child became divorced part of the share of the property originally owned by the parent could become owned by a third part. IN the case of bankruptcy that share may also not end up where it was hoped.
Asset Protection Trust?
These have been around for a while and are specifically marketed as trusts that can be used to avoid care home fees. Essentially the property is put into trust BEFORE the settlor knows they have to go in to a care home.
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So now I have to pay towards protecting other people's inheritances!
While there is a non-zero IHT threshold we will always have to pay towards protecting other people's inheritances.
which care home?
If the client successfully ends up with the State paying for the care home, beware. The client will have no choice of which home to go to. If the care home is funded privately through the sale of the house, the client/relatives can choose a care home of their liking. Believe me, I've seen a few care homes - I'm not currently in one, though! - and you really wouldn't want to live in some of them.