An article on home fee planning by David Coldrick, partner in charge of niche private client firm Wrigleys Solicitors' Sheffield office.
His book 'Protecting the assets of older people' is available from email@example.com Discount price for Tax Adviser readers only £125. Tel 020 8785 2700
Published in the February 2001 issue of "Tax Adviser"
Our scare-mongering press love a good 'human interest' story. It sells by publicising 'troubles': 'Lady, 85, gifts house and is thrown out by loving son'. This kind of thing does not happen very often. One always hopes the legal advice given before transfer took place was in the negative if only to protect the poor old lawyer…. I would not like to read 'The Sun says: Coldrick lost me my house'.
Stephen Parnham's article in the November edition of Tax Adviser was very useful. It reminded us that whereas tax lawyers and accountants automatically look at Inheritance Tax planning for their older clients they should not forget planning for the 'home fees' issue. For most people it is more relevant. It is a field that the tax adviser is bound to have to understand. Asset transfers and trusts mean tax implications.
However, I have observed that a lot is said about home fee planning through trusts but much less is said about the real basics behind home fee planning. That planning may have little to do with trusts but is a field which the adviser must master before moving on to trusts.
Often a knee jerk reaction is to advise upon the off-loading of assets into a trust without a real understanding of the regulatory background. Then the adviser tends to spend a lot of time fretting about both the wisdom of such planning and whether or not it actually works.
The alternative to a surfeit of trsust, which is even worse, is to adopt the feeble position of a hunted ostrich. I thus choose to 'Major' on 'back to basics' in this article if you will please forgive the dismal pun. I have not considered the ever popular, and frequently misunderstood, areas of asset protection via trusts and the, often theoretical, possibilities of local authority collection procedures.
Survey of this article
- What's the problem?
· Is free NHS care available? A crucial and often missed practical issue.
· What and is not is assessable capital? Basic planning points.
What's the problem?
Local authorities now arrange for care rather than provide it. Each area sets a 'standard rate' fee. For example in my hometown of Sheffield that is £231 per week per resident in a residential care home. That rate is the county's lowest but 1/3 of its private homes have gone bust in the last 12 months. It does not take an accounting genius to work out why. The rates in other areas can be hundreds of pounds per week higher. (I am interested in finding the highest.)
The standard rate is met by the resident if they have over £16,000 in capital. So far as pension and benefits do not meet the rest the Local authority foots the bill. They have a vested interest in collecting as much as they can from their citizens.
There is possible loss to an 'unprotected' estate of everything over only £10,000 in 'capital'. There is a sliding scale of local authority assistance below £16,000 but the whole lot, down to £10,000 of capital, can actually be swallowed up in fees. You can only keep £10,000 without loss of benefits. The NHS Plan (Command Paper 4818-II 27 July 2000) promised that the £16,000 upper threshold would rise this April to 'more than £18,000' but no mention of the lower level… Is this to be a pre-election surprise? (I doubt it).
Is free NHS care available?
Not such a stupid question as it might appear. Section 1(2) of the National Health Service Act 1977 makes it clear that NHS care is free 'at point of delivery' if not exactly free in terms of economic cost. The case of R v North and East Devon Health Authority, ex parte Coughlan (1999) 2CCLR 285 highlighted the fact that some care is still free under the NHS, even if the local authority actually get involved in the arrangements.
Broadly, simplistically and to cut a very long story very short indeed I would suggest that following Coughlan: If a resident's primary need for continuing care appears to be a health issue and/or common sense suggests that the care the resident needs is more than incidental care and attention then the NHS should be paying for it.
Coughlan made it clear that many local authority/health authority 'local eligibility criteria' for NHS continuing care were far too restrictive. It behoves the adviser to get to grips with those in their area. Are they legal? Should you be arguing over discharge into paying care?
There are safeguards to hospital discharge procedures, which seem to be widely ignored. See circulars: HSG ((95)39 and LAC (95) 17. These include provision of reasons why a person has to pay for care. If not issued in advance of discharge then an adviser should be reluctant to recommend discharge into a paying environment.
After discharge from hospital,claims for free care are harder. Who wants to apply for restitution upon the basis of 'mistake of law' under Kleinwort Benson Ltd v Lincoln City Council and Others [1998} 3 WLR 1095? This is a recipe for bed blocking but the client/patient has clear rights under the rules.
I would also note that if a person, such as a sufferer from dementia is 'sectioned' under Section 3 of the Mental Health Act 1983 then their care must be provided free of charge even after discharge under Section 117 of the MHA as affirmed in R v Richmond Borough Council ex parte Watson (The Times 17 August 2000)
If a person cannot obtain free NHS care the next question is:
What is and is not assessable 'capital'? Basic planning points
'Capital' is an complex concept not well covered in most benefits books. It is also not very well explained in the assessors 'Charging for Residential Care Guide'( 'CRAG'). In fact CRAG is sometimes just plain wrong in its interpretation of the National Assistance (Assessment of Resources) Regulations 1992 (as amended) which it purports to explain.
'Capital'. An 'elephant test' applies. Cash, stocks, shares, land, business interests and so on are all assessable capital subject to various 'disregards.'
Note: Spouses' responsibilities. Each person must be assessed on their individual resources or their share of joint resources. The adviser must boldly strike out nosy enquiries in financial assessment questionnaires of a local authority. CRAG paragraph 4.001 confirms this is unlawful. It is unlikely that a claim will be brought or can be sustained in most cases for support from a spouse. It is possible, in theory, via the Magistrates Court.
Some basic capital 'disregards': Planning points
1. The surrender value of a life insurance policy. NA(AR) Regulations 1992 (Schedule 4 Para 13). It was designed to protect endowments from early surrender due to their being assessed as capital. The disregard is referred to in the CRAG guidance para 6.028. CRAG, rather ineptly, attempts to exclude its effect from investment bonds, which as we know are life insurance policies as well as investment vehicles. They tend to pay out 101 per cent of the value of the policy investments at death. Strictly under the Fuji Finance case  4 All ER only 100 per cent needs to be payable to create a policy. Under analogous income support regulations, such as examined in the case R(IS) 7/98, these are clearly to be disregarded. Long-term planning with this in mind may be prudent. An investment just before entering care may enable the investment to be caught as 'notional' (pretend) capital. Such policies may usefully be written into trust to 'double up' upon the disregards available. Traded or second hand endowments may also fall within the disregard. As there is more than a mere 'surrender value' in some policies could an assessment on the surplus value be sought? Probably not. To get hold of it the disregarded surrender value would have to be disposed of. That cannot be in line with the regulations.
2. Personal Possessions. (NA(AR) Regulations 1992, Sch. 4, Para 8) 'Any personal possessions' are disregarded so long as not purchased with the intention of reducing capital for the purpose of reducing the local authority charge. The value of chattels is irrelevant. A classic car collection might not fit in the nursing home car park but even its worth would be disregarded unless sold and converted into non-disregarded assets. Such items may also be freely loaned or gifted without consequence. Continuing purchases of items for collections or valuable antiques are to be recommended.
3. The family home. (NA(AR) Regulations 1992, Sch. 4, para 1) This is disregarded indefinitely only if the resident's spouse or another 'specified relative' lives there. The latter must be over 60 or dependants under 16. There is a market in 'house-sitters' in certain families. The home is only taken into account if the last resident leaves. After April 2001 a three month moratorium will keep the family home out of assessment even then. This is a half-hearted allowance of little comfort or value to most residents. In the USA most States disregard the family home 'full stop'.
4. Personal injury settlements. (NA(AR) Regulations 1992, Sch. 4, para 10) These are trusts for compensation for any personal injury. This reaffirms the importance for means-tested benefits purposes, even long-term, for a trust receptacle to be used.
5. Other valuable disregards. These include the permanent disregard for the value of the right to receive income from a life interest trust and the limited 'reasonable period' disregard for business assets. For many older business people it is a bad idea to hang on to partnership property or shares in the family company. There is no assessment equivalent to inheritance tax business property relief. A deceased's estate does not become relevant until it is paid over to a beneficiary. Delay may be challenged but in practice is not.
Joint assets. These create problems of their own. That is especially in the case of land. Quite apart from the complex issues of; resulting trusts, constructive trusts and proprietary estoppel (re-invigorated by Gillett v Holt 2 All ER 289) a simple co-ownership of land is a complicating factor. Regulation 27(2) of the NA(AR) Regulations 1992 states that 'the resident's share [in land] shall be valued at an amount equal to the price his interest in possession would realise if it were sold to a willing buyer.' Following the cases of CAO v Palfrey (1995) 139, SJLB and Wilkinson v CAO (The Times 24 March 2000) as there is no likely purchaser willing to pay for a co-owned share (at least in situations where the purpose of purchase was residence and not investment) the value of a resident's share may be reduced to nil. A planning point is often stated to be the splitting of land ownership but I would suggest that may not always work if the purpose of the purchase was investment.
There are undoubted advantages in setting up trusts for clients assets but the above basics should not be ignored in reducing liability to pay. Thinking ahead is always best.
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February 2001 by