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Inter-relationship between IHT and LA Care

I wonder if any of our legal/accounting experts can give a succint explanation of the overlap/differences between IHT planning and 'willful deprivation of assets' which LAs can charge against you in the case of needing residential care? In principle both areas involve trying to keep your assets away from official hands. So, for example, does the IHT 7 year gift rule trump the LA 'willful deprivation', or can the LA come for a second bite?

Does a payment to a third party (eg paying off a loan) on behalf of, but not to the child, count as a 'gift' to the child for IHT/Wilful deprivation rules?

I notice the proposed 'cap' on social care costs seems to envisage that you have to sell off every asset apart from your home before the 'cap' can kick in. Whoop de doo....
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Comments

  • atush
    atush Posts: 18,731 Forumite
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    edited 10 January 2014 at 5:36PM
    Any gifts given past an age/time when an individual is thought likely to need LA care is DOA.


    IHTax is different, and if the estate isn't large enough that paying it is likely, you can't use anti IHTax measures to get around it. but if the estate is large enough, then proper IHTax planning (before the person is likely to need care) can be used.


    However, if you care for the relative, you don't WANT them in LA care, but in a much nicer, better home. So plan for paying for that alongside any gifts.
  • dunstonh
    dunstonh Posts: 118,547 Forumite
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    Does a payment to a third party (eg paying off a loan) on behalf of, but not to the child, count as a 'gift' to the child for IHT/Wilful deprivation rules?

    Depends on whether LA care is anticipated or not. The minute LA Care is expected or looking likely, then it is effectively becomes a deprivation of assets. If it is not expected or looking likely then it is not deprivation of assets.

    However, as atush says, you wouldnt wish LA care on the relative. It is not something anyone should plan for.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    I wonder if any of our legal/accounting experts can give a succint explanation of the overlap/differences between IHT planning and 'willful deprivation of assets' which LAs can charge against you in the case of needing residential care?
    Deprivation of assets can happen whenever there is a personal need for care in the future that has become known. No theoretical limit though in practice there are likely to be limits on how far back a council will go.

    Inheritance tax is a completely different and unconnected issue but inheritance tax planning can be a good and entirely acceptable justification for planning that also happens to reduce assets for care funding, provided there wasn't a known future need for care at the time of the IHT planning.
    Does a payment to a third party (eg paying off a loan) on behalf of, but not to the child, count as a 'gift' to the child for IHT/Wilful deprivation rules?
    It's a gift for both deprivation of assets and IHT.
    I notice the proposed 'cap' on social care costs seems to envisage that you have to sell off every asset apart from your home before the 'cap' can kick in. Whoop de doo....
    Beats having to live in the lowest bidder place the local council can find, in whatever part of the country they choose to ship you to.

    The best case is simply to have saved enough to pay for good care for yourself for life, whether it's living independently or with care needs. Immediate needs annuities can be very helpful when more intensive care is needed nearer the end of life, with such policies typically only having to pay out for a couple of years, though one provider did report that some remained paying out for as long as six years. At age 65 even an enhanced annuity can pay out twice as much as usual as a standard annuity would pay to a person who has an anticipated remaining life of ten years. That sort of thing can give really good options to those who are using income drawdown for much of their retirement income then only consider buying an annuity when their personal health makes it a good deal.
  • Thank you - that was a most helpful response and covered just about all the issues I wanted to raise. I take the point about LA care, but the five star care would make short work of the assets of all but the richest people. Fine if you knew you were going to be in there for six months, but six years could see the destruction of wealth built up over generations !
  • dunstonh
    dunstonh Posts: 118,547 Forumite
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    but six years could see the destruction of wealth built up over generations !

    6 years in local authority care would at least ensure an early death and make the beneficiaries happy.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    edited 10 January 2014 at 10:02PM
    the five star care would make short work of the assets of all but the richest people. Fine if you knew you were going to be in there for six months, but six years could see the destruction of wealth built up over generations !
    Maybe. Lets look at what might happen to someone who has tried to prepare for something that may affect one in five of us.

    From a pension pot at age 85 or older at the moment it's possible to draw around 20% of the pension pot value a year, which will reduce the value of the pot by perhaps 15% assuming a favourable market. What this means is that to get £10,000 of income and capital to spend takes a pension pot of £50,000. A pot of £200,000 could provide £40,000 plus the state pensions to get to perhaps £50,000 total. This will drain the pot quite rapidly, with the GAD limit restricting how much can be drawn after the first year, but many people can get to a pot size of this sort of level if they try to provide a good income in retirement.

    Add in say a lifetime mortgage or children adding resources or renting out the home and more income can be made available.

    For more normal retirement income planning a pension pot of £200,000 with a desire to preserve the whole pot for inheritance could produce an income of 4-6% a year, say £10,000 a year. Median average pensioner income is around £18,000 so that's the sort of pot size that a person who wants an average pensioner lifestyle would have to be trying to accumulate.

    £200,000 may seem like a lot but it only takes £130 a month gross for forty years at the average UK stock market growth of about 5% after fees. For most of us an employer is likely to match half of that cutting the out of pocket cost to £65, then tax relief cuts it by another 20% to just £52 a month, increased with inflation each year. £52 a month isn't too scary for a lot of people, just takes getting started. Of course it is unrealistic for a lot of people as well, just trying to give some idea of what it can take to get things done.

    It's not easy planning to do but it is possible for those in more modern pensions - not final salary types - to end up with fairly decent provision to cover even this sort of situation.
  • atush
    atush Posts: 18,731 Forumite
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    Thank you - that was a most helpful response and covered just about all the issues I wanted to raise. I take the point about LA care, but the five star care would make short work of the assets of all but the richest people. Fine if you knew you were going to be in there for six months, but six years could see the destruction of wealth built up over generations !


    there are different stars of care, not just the 1-2 of LA and the 5 of the rich/well prepared. there are 3,4 between.


    If you have actually loaned money to a relative who will soon need care, I assume you can prove it (ie bank transfers or cash taken out/deposited, work done or debts paid off at the same time etc.


    I suggest you collect your evidence, and get the money back if they have it. Then wait to see if the evidence is required.
  • Does a payment to a third party (eg paying off a loan) on behalf of, but not to the child, count as a 'gift' to the child for IHT/Wilful deprivation rules?

    So this is about working out a way for an aging parent, who may or may not be needing residential care in the foreseeable future, or who may or may not die within the next 7 years, to pay off a loan for their adult child.

    Paying off a loan on behalf of someone else would be regarded as a gift if the Aging P died.

    Paying off a loan on someone else's behalf when the need for residential care was known about and thus reducing capital could be seen as Deprivation of Assets if a financial assessment for Local Authority funded care was carried out.

    However kind the intention might have been, a person needing residential care should act in their own best interests, not their adult child's, if LA funding for care will be necessary.
  • Yes, I know all the moral arguments. The truth remains however that the inheritance in mid-life is a truly life-changing event (if not for you then certainly for the grandchildren), and likely to become even more so as incomes stagnate and income-inequality grows in this country. To have this depending on luck ie whether one's parents need residential care or not seems to me rather iniquitous.
  • atush
    atush Posts: 18,731 Forumite
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    It seems to me to be iniquitous to expect those who save for and plan for residential care and other events to have to pay for the LA care of those whose relatives would prefer to inherit.


    Money belongs to those who own it, and should be spent by them how they wish, and spent on care if they need it.


    If they don't need care, they can pay off the debts of their !!!!less relatives if they wish. They can gift life changing money, if they wish. If they will need care soon, they can't.
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