As we age, it’s natural to want to support our family members by giving them financial gifts to perhaps help them onto the housing ladder or cover the cost of getting a University education.
However, it’s important to be aware of a growing issue that Local Authorities find concerning – the intentional ‘Deprivation of Assets’. This refers to using gifts as a means to avoid paying for long-term care.
Social care in the UK is not free. A person’s savings, (including cash and certain investments) property, and income are all included in a Local Authority’s financial assessment to determine their contribution toward their care. If it is suspected someone has deliberately deprived themselves of assets which would have otherwise been taken into account, which could include, but is not limited to, giving away money or transferring property to a family member, those assets may be included in the means test, in that the Local Authority will treat the person as if they still had those assets, in order to determine ongoing care costs. Contrary to popular belief, Local Authorities can investigate the Deprivation of Assets which have occurred at any time and not just within the standard “7-year rule” for gifting and Inheritance Tax planning. This misconception can lead many to fall foul of the legislation regarding access to Local Authority funding for care services. It is therefore important to seek specialist advice before you contemplate disposing of any assets.
So how can you avoid financial gifts being treated as a Deprivation of Assets, and what will happen if you are caught out?
How is care funded?
In the UK, local authorities provide some levels of funding to about half of the people who require permanent residential care. The level of assistance you receive from social services for your care costs depends on the value of your assets. If you have assets above a certain financial threshold you will be expected to pay for the full cost of your care (unless you are eligible for NHS continuing healthcare funding or other funding).
Once a needs assessment is conducted and it is determined that you require a care home placement, your local council will conduct a financial assessment (or means test) to determine if you are eligible for financial support. Your assets, including your home (unless your partner or certain relatives reside there), and income will be taken into consideration.
In England, the capital threshold for government-funded care is £23,250. If your assets exceed this amount, you would be responsible for covering all care fees yourself.
Covering care home fees entirely out of your own pocket can be financially burdensome, leading some individuals to sell their homes in order to afford long-term residential or nursing care. Consequently, individuals may consider reducing their assets in order to fall below the threshold and qualify for social care funding.
Establishing Deprivation of Assets
Local authorities must adhere to the regulations outlined in the Care Act 2014 and its accompanying guidance when investigating allegations of gifting and deprivation. Unfortunately, family transactions often come under suspicion during such investigations, even when there are valid reasons for making financial gifts or arrangements.
While each person’s situation is unique, if someone has made significant gifts or transferred property and subsequently seeks financial assistance from the Local Authority to cover care home fees the Local Authority may assume there has been a deliberate Deprivation of Assets.
Gifting often aligns with the individual’s desire or necessity to engage in inheritance tax planning by utilising annual allowances through financial gifts. It’s not unusual for elderly families to choose to downsize their homes for maintenance reasons, then gift the proceeds from their home sale to their adult children. But while these arrangements may seem logical and practical, they often lead to issues later on when the person who made the gift requires care.
When determining if deprivation for the purpose of avoiding care charges has occurred, the Local Authority considers several factors. Firstly, they evaluate if avoiding the charges was a significant motivation. Secondly, they assess the timing of the disposal of the asset and if the person could have reasonably anticipated the need for care and support at that time. Lastly, they examine if the person had a reasonable expectation of contributing to the cost of their eligible care needs.
During its assessment process, the Local Authority will enquire about property ownership and examine bank statements. If a claimant is found to have recently reduced their wealth, even through something as innocent as purchasing an expensive item of jewellery, deliberate Deprivation of Assets might be assumed. However, to establish deliberate deprivation of assets, the Local Authority must prove that the claimant was aware of the possibility of them needing care in the near future and that the avoidance of care fees was a significant motivation. Each case would turn on its own facts
Other examples could include:
- Giving a large sum of money to a family member or friend
- Transferring property into someone else’s name
- Selling a property below its market value
- Buying costly items or giving extravagant gifts
- Engaging in excessive and sudden spending
- Gambling
- Putting money into a trust
The concept of ‘intention’ is vital where Deprivation of Assets is suspected. Was it reasonable for someone to anticipate needing imminent care and support when they gave a grandchild a sizable gift or transferred the ownership of their property to them, or is it acceptable to presume someone is already aware of their care needs if it was an independent assessment that suddenly found that they need residential care?
If the Local Authority is able to prove the Deprivation of Assets, the value of the asset will still be considered in the financial assessment and will be referred to as notional capital (capital that a person does not actually have, but is treated as if they do).
Once proven, the consequences for the person needing care and their family can be disastrous. The Local Authority are likely to withdraw or outright refuse to offer any financial aid for home care or care facility bills. This can cause the individual’s care placement to be jeopardised, as in many situations, the assets have already been disposed of and there is no money to pay the fees.
As a last resort, they can try to recover the debt through the county court system, but this should only be done after all other avenues have failed.
The Local Authority’s judgement must be reasonable, and they cannot assume deliberate deprivation without a full investigation to the circumstances. There may be valid reasons why a person has disposed of an asset and these should always be investigated first. if there are genuine grounds to believe it unfair, the claimant does have the right to appeal, to the Local Government and Social Care Ombudsman
The risks associated with gifting assets
When it comes to giving gifts, there are numerous important risks outside of being accused of ‘Deprivation of Assets’ to be aware of. It’s crucial to understand that once a gift has been given, there’s no going back.
One major risk is the potential loss of financial security. Any assets gifted might be needed for future unforeseen expenses (such as relocation costs, or the need to access private care in the comfort of your own home).
Reducing assets also means sacrificing choice and financial control. Situations and relationships can change unexpectedly, and if another individual has control of finances or physical assets, a person can be left vulnerable and with limited options.
In some cases, gifting a house to someone with the understanding that it will remain their domicile during their lifetime can have disastrous consequences. If the recipient of the gift goes through a divorce or bankruptcy, the house may have to be sold to settle financial obligations. This could leave the ‘gifter’ without a home.
It’s also crucial to consider the potential tax implications. If the gifter or the person in receipt of the gift make a profit from it, either (or both) may be liable for Capital Gains Tax. This is particularly relevant for second homes that have increased in value.
Alternative ways of gifting sizable assets
Utilising a ‘Lifetime Trust’ is one way to efficiently transfer ownership of assets, such as money or property, before death. This method avoids direct transfers to individuals and instead entrusts asset management to designated trustees. By establishing a Lifetime Trust, the assets included will not form part of the recipient’s estate, whilst still being taken out of the ownership of the gifter, which can solve many of the potential issues outlined above. .
Lifetime Trusts should not be used purely for the evasion of care fees, as the act in itself can be perceived as a deliberate Deprivation of Assets when undergoing an assessment for Local Authority care funding.
Legal counsel should be sought if creating a Trust or gifting any sizeable assets, especially the transfer of a property, is a realistic proposition. This will ensure that everything is done legitimately, and through the proper channels. This is the only way to ensure that generosity doesn’t cause greater complications further down the line.
