How Can I Protect My Home?
As our health and living conditions have improved, accompanied by improvements in the field of medicine, the population is living longer. Consequently, the likelihood is that an increasing number of people will need healthcare in the future.
Life expectancy has increased to 81 years for men and 86.5 years for women.
As a result, the number of people entering care homes has increased, with 1 in 3 men and 1in 5 women now needing residential care at some stage of their lives.
Under the terms of the community care act of 1990, if you have assets of more than £23 000 (this includes your home, cash, savings, shares etc) then you must pay all your own care costs.
Costs will vary from area to area, dependant on the level of service required, but will be between £25 000 – £30 000 per annum.
When savings are exhausted, councils have the legal right to seize all but £23 000 of your assets to pay towards your long term care costs.
As a result, each year councils throughout the UK seize 70 000 homes to help recover care costs.
David and Julie have 2 children, which are no longer dependant. Unfortunately David died at the age of 67. David and Julie owned the property jointly, so it has passed to Julie by survivorship. Julie was healthy the majority of her life, however she got to an age where her children could no longer care for her at home, which cost Julie £26,000 pa. Julies only assets are her house worth £120,000 and savings of £18,000. As Julie has some assets she will be means tested. because they total over the £23,000 limit! Therefore she will have to pay in full for the care costs of care. As the average stay costs £112,000 this will have a dramatic effect on the legacy David and Julie had hoped to leave their children.
But could this have been avoided?
Option 1: In the past people have attempted to give away/gift their homes to their children in an attempt to avoid paying care costs. The disadvantages of this course of action are:
- Relationships within the family can deteriorate over time and the children (the the legal owners) can evict their parents from the property.
- Capital gains tax would be payable by the children on the eventual sale of the property.
- On leaving the house to the children it would form part of their estate and, as such, could form part of any bankruptcy/divorce proceedings leaving their parents vulnerable as the house could be sold as a consequence of same.
This approach almost inevitably fails, as the local authority views this as a “deliberate deprivation of assets” (why else would you give your home away otherwise?) “Unless there is a strong reason for doing so i.e. to mitigate a potential inheritance tax liability in the future”, which is not illegal and forms part of a tax efficient estate.
Option 2: Set up a protective property trust (for the children’s benefit) with the surviving spouse having a life interest in the property. How does this work in practice? This course of action will allow couples to protect their property from the Community Care Act and leave an inheritance to their loved ones, as was their original intention.
In addition the interests of the spouse are protected as the spouse has a lifetime interest in the property. With a properly drafted Will the spouse can downsize, if required and also borrow against the property.
How does this work?
The Majority of people own their property as “Joint Tenants” i.e. when one owner dies the survivor would then own the property 100%. This situation would then enable the local authority to force the sale of the property to pay for care.
To avoid this we simply change the way the property is owned from “joint tenants” to “tenants in common” this means that each partner leaves their share (usually 50%) to their children in trust, in their respective Wills, but stipulating that their respective spouse has a lifetime interest in the property (right to reside).
As we don’t know who is going to die first, both partners need this type of will.
Then on the second death, the trust will be wound up and the beneficiaries (the children) will inherit, which was the original intention.
As a result of the above, should the survivor go into care and be means tested for care costs 50% of the property is in the trust and cannot be touched, while the remaining 50% has a nil value as it is not a marketable property.
The local government ombudsman has previously suggested that a local authority should have “significant evidence of opinion” giving it reason to disagree, when refusing to accept that an interest in a jointly owned property had a low or nil value. ( Age Concern fact sheet 38th April 2009)
However for a property trust to work the following needs to apply.
- Both parents need to be alive
- Property needs to be owned as tenants in common
Severing the tenancy has other benefits.
Inheritance tax mitigation
Protects children’s inheritance from the effects of divorce or bankruptcy
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