The Truth about Deliberate Deprivation of Capital
Thinking about making a significant gift to your children? Worried that the council might snatch back the gift if you later go into a care home? Here’s what you need to know.
Many parents, in this uncertain world, are looking for ways to give their children a “living inheritance”, by gifting assets to their children in life, rather than on death through a will. There is increasing evidence, as a 2015 report from HSBC bank attests, to suggest that that the traditional inheritance is starting to die out, with a growing proportion of retired people giving large sums of money, or ownership of their family home, to their children and grandchildren.
These living inheritances are usually given to minimise inheritance taxes, provide certainty and security for the family as a whole, and to see loved ones enjoy the benefit of the assets. They are given either as outright transfers, or as trusts set up by the creation of a Family Trust Deed.
There is however a spectre that hangs over a decision to give a significant gift to a child or grandchild, particularly when the gift in question is something as important as the family home.
The issue boils down to this simple but chilling question:
“What if, in years to come, I need to go into a care home? Can the council snatch back that gift from my loved ones and use it to pay for my care?”
And the reason why this question is such a worry, is because, in some circumstances, the answer to that question can be a resounding “yes”!
When can a council snatch back a gift?
Local authorities are entitled to rely on an anti-avoidance rule against “deliberate deprivation of capital”. This is where someone intentionally decreases their overall assets in order to reduce the amount they are charged for their care.
When carrying out a means test for care, local authorities can look for evidence of deliberate deprivation of capital. If deliberate deprivation is proven, the asset in question can still be taken account of in the means test, despite having been gifted to a loved one.
So, when considering whether to make a significant gift to a loved one, it’s vitally important to know where you stand regarding Deliberate Deprivation of Capital.
What is “Deprivation”?
Deprivation, in this context, would include: -
transferring ownership of an asset to someone else - for example signing your house over to your children or giving them a large sum of money,
putting assets, such as savings, investments or the family home, into a Family Trust.
Investing money in certain types of government bonds which are exempt from care home fee assessment.
Pretty much any decision to gift money or assets could be regarded as “deprivation”, by that definition! Thankfully, deprivation on its own isn’t enough to trigger the anti-avoidance rule.
It’s the intention behind the deprivation that’s the crucial consideration – i.e. whether the deprivation is “deliberate”
What is meant by “deliberate”?
To find that someone has deliberately deprived themselves of an asset in this context, a local authority must establish that avoiding care costs was the only reason, or a significant reason, why the asset was given away.
Local authorities have the right to investigate whether a deprivation was deliberate, and their investigation can include: -
The timing of the gift – at the time of the gift was there a reasonable expectation that residential care would be needed in the near future?
Was there also a reasonable expectation that a contribution would have to be made to the cost of care.
Foreseeability: the key factor
The rules surrounding deliberate deprivation say it would be unreasonable to for a council to decide that someone had disposed of an asset to avoid care fees if, at the time of depriving themselves, the person was fit and well and could not have foreseen they would be needing to go into a home.
So, when considering whether to make a significant gift, it is important to make sure you can clearly demonstrate two things, to reduce the risk of the gift being snatched back in the future: -
- that avoidance of care costs is not you main or only reason for giving the gift; and
- that you are fit and well, able to live independently and can’t currently foresee a need to go into a care home.
Simply making a straightforward transfer, for example of a significant chunk of your investments, or of ownership of your home, is unlikely to achieve those two goals. However, there are two readily available safeguards you can deploy.
First, instead of simply transferring absolute ownership of the assets, you can make the gift via A Family Trust, by executing a Family Trust Deed. You can include clear wording in the Family Trust Deed, spelling out exactly why you are making the gift, and why you are making it now.
For example, you might be doing this for tax reasons, or to enable an asset to pass to the next generation of your family without the expense and complication of going through probate at the end of your life.
Stating your reasons clearly, in a readily accessible document, provides clear evidence of your intention, and eliminates the suggestion of trying to avoid care costs.
Second, it’s wise to arm yourself with evidence that you are fit and well, able to live independently and have no presently foreseeable need for care and support. This can be in the form of a letter from your GP. You often don't even need a medical examination for this; your GP will often be willing to write the report based on a review of your medical records. You will usually have to pay your GP for this service, but it’s normally quite a modest fee.
This evidence makes it clear that the gift hasn’t been made at a time when there is a reasonable expectation of having to go into care and having to pay for it.
Employing these two safeguards when you give a significant gift will make it difficult for a local authority, in the future, to try snatch back the gift on grounds of deliberate deprivation.
However, it’s important to be realistic. These safeguards are not a cast-iron solution. All they do is give you a fighting chance of defeating a deliberate deprivation claim. There’s nothing to prevent a local authority from launching an investigation, and local authorities don't publicise their policies about gifts and potential “deliberate deprivations”.
Which means it would be a good idea to employ a third safeguard, which is to register a Lasting Power of Attorney for Property and Financial Affairs. Because there’s nothing you can do to prevent a local authority chancing their arm by making an investigation, you need to be forearmed to defend the gift, if the issue comes up.
Unfortunately, this is an issue that’s only going to come up when you’re in need of residential care, which will probably be when you’re too frail and vulnerable to stand up for yourself. Registering your Lasting Power of Attorney will mean you have someone officially in place to stand up for you against the council and uphold the gift.
If this is an area of concern for you or your family, don't hesitate to get in touch for more advice and information about what to do. Just call us on 0151 601 5399, or fill in the contact form below. We're here to help.
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