Anyone intending to run down their assets in a bid to beat the long term care (LTC) means test could get a nasty shock. The ground rules appear straightforward enough. Those with assets worth over £16,000 (including the value of their own home) will not normally get any state help towards care costs. However, from this April, the limit rises to around £18,000 and a person’s home will not be counted as an asset for the first three months of the care process.
But when conducting means tests, local authorities always consider what has been given away in the past and they are allowed to look back as far as they like for the purpose. Assets that are considered to have been given away strategically are counted as “notional capital” and included in means tests calculations.
Contrary to popular belief, local authorities can take into account assets given away by an elderly person more than six months before being admitted to care.
It is true that authorities only officially have the power to claim care costs from those who received assets if the transfer took place within this six month period. But, when longer time periods are involved, they can put pressure on relatives to pay them in lieu of assets received by pursuing the elderly person through the bankruptcy courts.
A further popular misconception is that local authorities will ignore assets given away seven years before care is needed – the seven year time period is relevant only for inheritance tax purposes and has no direct connection with LTC planning.
The fact that time has no bearing on whether a gift can be considered notional capital was established in a court case in February 1998 (Mrs Yule v South Lanarkshire Council).
An appeal held last August (2000) upheld the original decision but there are grounds for hoping that the law can be changed in the future.
Margaret Richards, an independent legal expert on LTC based in Leeds, says: “The case contained human rights issues because local authorities are in effect judge and jury in their own cause. Sooner or later, the decision will be challenged in the UK courts under the Human Rights Act. Local authorities can’t make a fair decision in a case involving serious money because it involves a financial interest.
“I think the decision in the Yule case is wrong because now local authorities can draw what conclusions they like and the onus is very much on the family or elderly person to prove they are not giving assets away. Placing the burden of proof on the local authorities instead would be an improvement on the present situation.”
For the time being, no strategy for giving away assets can be considered totally watertight but attitudes towards this issue can vary noticeably from one local authority to another.
Generally, the closer that a gift is made to the point of care being needed the more likely it is to be treated as notional capital. Other important influencing factors are likely to be the value of a gift – in particular the proportion that it constitutes of the donor’s overall assets – and the motive for making a gift.
Solicitors for the Elderly, a national association of solicitors, barristers and legal executives launched in October 1999, can offer more specific advice on asset protection. Vice-chair Caroline Bielanska says: “This is a highly complex area but there are certain procedures that will stand up to scrutiny from any local authority. Someone about to go into a nursing home who owns a valuable antique piano, for example, can give it away to a relative and it will be fully disregarded for means test purposes, although the recipient could incur a capital gains tax (CGT) liability as a result.
“Husbands and wives can also do a lot to help themselves by making full use of their wills. They can ensure that at least half of their assets go to the next generation via will trusts which leave the surviving spouse adequately provided for without bringing them above the £16,000 limit.”
But even those who manage to construct a strategy of gifting assets which doesn’t fall foul of their local authority could end up far worse off than if they had held on to their assets and paid for LTC privately or taken out insurance for the purpose.
There are many potential pitfalls that must be considered. The recipient of a gift could, for example, get divorced and the ownership of the gifted assets may then become part of a marital settlement. Legal implications relating to the bankruptcy or death of a recipient can also put a spoke in the wheel.
Taxation considerations must also be taken into account. The profit on an individual’s prime residence, for example, does not incur a CGT liability but, once the house has been gifted, such a tax liability may well arise.
Furthermore, and perhaps most importantly of all, elderly people who run down their assets to below the means test threshold must then face the consequences of being dependent on state help.
Robert Elliot, the chief executive at Manchester-based specialist LTC intermediary Care Asset Management, says: “Those who depend on the state leave a great deal to chance because local authorities differ noticeably in their attitudes towards care and in the budgets that they have available for it. Their financial resources are becoming ever more stretched and we are seeing a number of regions around the country where funding cannot be provided for identified care needs for a number of months.
“Local authority funding is likely to be at only a basic level and may well limit the choice of care available. The individual may therefore have to settle for less comfortable surroundings than if they had paid privately.”