Cunning plans to avoid care costs will backfire
Nobody wants to see the costs of care eat away at everything they have worked so hard to build up during their working life. Unfortunately, whoever wins the election, we know more of us are going to end up paying more for care later in life. Unsurprisingly, for many older people, this has focused their thoughts on trying to find a way around the rules - so they get to keep the money. Unfortunately, unless you're careful, this will backfire horribly.
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There are three common approaches that can leave people either back where they started - or dramatically worse off.
Giving too much money away
James Hambro & Co financial planner Charles Calkin says he comes across a lot of people who are giving their cash away as quickly as possible - both to help their children onto the property ladder, and help their own ageing parents get care later in life.
He says this generosity is clearly laudable and will reduce the assets people have for the council to use to pay for care, but everyone needs to take care that they don't leave themselves short. He explains: "The best gift you can give your children is not to be a burden to them towards the end of your life when their resources are stretched and meeting your needs requires enormous sacrifice."
If you choose to give everything away, with the understanding that your children will care for you or pay for care when you get older, Calkin says it's essential to have something in writing. He explains: "You might think you can give money to your children without any formal agreement and that they will look after you anyway, but that may not be possible. They may need the money to pay for a home, in which case the cash is likely to be locked in bricks and mortar and not available for you. In the event of a divorce – unless you have put in pre or post-nuptial agreements – you may see half the gift disappearing with an ex-husband or former wife."
Giving money away - with strings attached
In inheritance tax terms, if you have too many strings attached, then the money is not counted as having been given away at all. It means, for example, that if you try to sign your property over to your children, and continue living in it, you are still benefiting from it, and the authorities will count it as not having been given away at all. In care terms, it's always possible that any government will bring in a similar measure.
Giving money away at the last minute
In any case, the rules at the moment already mean that if the authorities think you have given things away specifically to avoid paying for your own care, they will challenge whether you have deliberately deprived yourself of an asset to get around the rules.
The good news is that this doesn't leave us without options. There are three effective approaches.
Calculate what you can afford to give away
Your best bet is to give large gifts at a time when you expect to live for at least another seven years. The inheritance tax rules mean that if you give away a lump sum, then as long as you live for seven years after making the gift, the cash is considered out of your estate for inheritance tax purposes. The idea is that by giving the cash away while you are in good health it also makes it very difficult for the authorities to argue that you are deliberately depriving yourself of assets, because they have to show that you knew you may need care and support in the future when you gave the assets away.
The aim, however, should not be to give away everything - and avoid paying care costs altogether. Calkin says that by contrast, he would recommend planning specifically to leave cash aside for care.
Unfortunately paying in full requires enormous sums of cash, and could eat up a huge chunk of your wealth. He says, therefore, that if there's a risk a substantial proportion of your money will be eroded by care costs, it's also important to have a decent life insurance policy in place, to provide an inheritance for your children. This should be written in trust so it falls outside your estate for inheritance tax purposes - and they won't end up paying tax on it.
Pass money on gradually
Calkin explains: "There is another way to give without having to think seven or more years ahead. An underused facility is "gifts out of normal expenditure"." You need to start by drawing up a budget of income and outgoings. If you have more cash coming in than you do going out, you can give away as much as you like from the surplus. This falls out of your estate immediately - so you don't have to wait seven years. The key is to make a clear note of what you can afford and what you are paying. Also exempt are payments to help with another person's living costs, like an elderly relative or a child under 18.
This also helps with the costs of care, because when the local authority is weighing up whether giving capital away was done to avoid care costs, they have to consider whether it was out of character with previous spending. If gifts are part of regular expenditure, it makes it difficult to argue this case.
Make use of annual allowances
In addition to gifts out of normal expenditure each individual has an "annual exemption" of £3,000 (therefore £6,000 for a couple) worth of gifts they can make each tax year without these gifts being added to the value of an estate. This can be carried back one year if you haven't fully used the previous year's exemption.
It is also possible to give away wedding gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild and £5,000 for a child). Finally, it is possible to give any amount of gifts of up to £250 per person during a tax year as long as another exemption has not already been used on the recipient.
By sticking with the inheritance tax rules, there is a good chance that within the current care rules, you are protected from a charge of deliberately depriving yourself of assets to get around the costs of care. The local authority will take lump sum gifts into account, but it has to show that avoiding care charges was a significant factor, and if this is something you have had in place annually, for inheritance tax purposes, that will be difficult to prove.
The only fly in the ointment is that unfortunately governments are apt to keep changing the rules, so whatever you put in place, it's worth speaking to a solicitor, and revisiting it whenever the government moves the goalposts, to check they haven't affected your plans.