Have you considered an Asset Protection Trust as a way of helping your family avoid care home fees? Coodes Partner and elderly client specialist Louise Southwell comments on the risks.
There are many potential pitfalls of gifting or selling your home to your children during your lifetime. In fact, it is rarely advisable. For some people the aim is to try to avoid having to pay for expensive care home fees. In most cases it will neither save inheritance tax nor protect the value of the home against means testing for care funding purposes. In many instances it will cause expensive problems.
Many people believe that a safer alternative is to set up an Asset Protection Trust and transfer ownership of their home into that. In certain very limited cases this can work but there are risks.
I am not going to consider the inheritance tax issue, as that is a whole other topic, but let’s consider the possibility of using an Asset Protection Trust to protect the value of your home against means testing for care funding purposes.
If you are given a place in a care home, a Local Authority must carry out an assessment of your ability to pay for your care. If you have assets worth more than £23,250 you will have to pay for your care in full. The value of your share in your home will be taken into account when calculating its worth, unless it is occupied by your partner or spouse or an older or incapacitated relative or dependent child.
What if you dispose of your home, with the intention of taking it out of the equation for means-testing? Well, should you then need care then the Local Authority is entitled to regard that disposal as a deliberate deprivation of capital and assess you as if the asset was still yours. My colleague Clare McLeish writes about this here.
If your Will is properly drafted by a qualified lawyer it is absolutely possible and acceptable for you to ring-fence the value of your share in your home against means testing and depletion, should your partner or spouse need to be in residential care after your death. This can be done either as an outright gift or by setting up a Trust. The latter is usually the more attractive option to retain some flexibility in the arrangement for the surviving spouse or partner.
I say “properly drafted” because here at Coodes we are unfortunately engaged in unscrambling a number of schemes for clients. Before consulting us, they purchased their schemes from enticingly named national companies alleging to be experts in Trusts. The set-up costs are generally around £4,000-£5,000 and in each case the scheme is unnecessary.
The term Asset Protection Trust is a bit of a giveaway. The phrase is used not to describe one particular type of Trust (it can apply to a variety of different sorts) but the purpose of the Trust. This is to protect the assets in it against means-testing and use for care funding and/or tax liability.
The problem is the same whether you give away or sell the asset to a Trust. If you sell your home to the Trust, you may well incur a liability to stamp duty land tax as well as the expense of formal valuation of property and Land Registry fees. If you gift the property or sell it at undervalue, you may also find yourself having made a gift with a reservation of benefit for inheritance tax purposes. You may also incur an annual charge to income tax under the previously owned asset taxation rules. Once the home is disposed of to someone other than the occupier, the capital gains tax principal private residence relief it is lost. In addition, there will be no tax uplift to the market value of the property when the person who disposed of the property passes away.
And of course, once you have given it away, you lose your control of your own home.
So, should you be tempted to part with the ownership of your property, tread carefully and seek proper advice. All is not as simple as it may first appear.
Louise is based in Coodes’ Wills, Trusts and Probate team.