The Government’s proposed reforms to health and social care will still leave many people having to pay large amounts in care home fees. However, these costs can often be reduced or even avoided altogether with appropriate planning. This article looks at the rules in England; the rules in different parts of the UK may be different.
The government has announced proposals to change the rules around how much people have to contribute towards care costs and at what stage, funded by a proposed new Health and Social Care Levy.
What are the proposed changes to health and social care funding?
If you need local authority care, the means testing rules are applied to decide how much you must pay towards the care; currently the rules are as follows:
- if your capital is above £23,250 (the “upper limit”) you have to pay the care fees in full
- you do not have to make a capital contribution to care costs where your capital is less than £14,250 (the “lower limit”) - although you may still have to contribute from your income
- between £14,250 and £23,250 you have to make a partial capital contribution (as well as an income contribution, where appropriate)
- there is no cap on the maximum care costs you may have to pay over the course of your lifetime.
Under the new proposals:
- the lower and upper limits will be increased to £20,000 and £100,000 respectively from October 2023. This means that anyone with capital of less than £100,000 may receive some support towards their care costs (albeit limited) and those with capital of less than £20,000 will not have to make a capital contribution (although may still have to make a contribution from their income)
- a lifetime cap of £86,000 on care costs will be introduced from October 2023. This means that you should not have to contribute more than that amount towards your care costs (although the cap isn’t being backdated).
However, it’s important to note that the cap only applies to the cost of actual care and not to other costs such as accommodation, energy, food or water. These costs, particularly the costs of accommodation, can often far outweigh the costs of care, so many people will still face the prospect of very large care bills which will erode their families’ inheritance.
Will I lose my home if I need to pay for care?
The value of your home is included in the assessment of what capital you possess, for means testing in many circumstances. For example, it will be included in the assessment where you no longer occupy your home (e.g. if you are moving into residential care permanently) and none of the other exemptions applies. This may lead to your home having to be sold to fund care fees.
It may be possible to avoid selling your home during your lifetime by entering into a deferred payment arrangement (broadly whereby the fees are repaid from sale of the home after your death). However, interest and fees apply and such arrangements will still reduce your families’ inheritance.
Example where home inherited absolutely
John and Betty jointly own their home, worth £300,000, free of mortgage. They have owned it equally as joint tenants (see below) since acquiring it. The home is their only major asset. No-one else occupies it apart from them.
On John’s death in November 2023, his share in the home passes to Betty as the surviving joint tenant. Unfortunately, Betty’s health declines rapidly after John’s death and she has to move into permanent residential care 12 months later.
The entire value of the home will be included in the means assessment for Betty. Her capital will be above the £100,000 threshold, meaning that she will be liable to pay the fees in full without any local authority funding. The amount she has to pay for care will be capped at £86,000, however her other costs (e.g. accommodation, energy and food) will not be capped.
Can I avoid paying care home fees by making a lifetime gift?
Some people might consider giving their home away during their lifetime to try to get it outside the scope of the means testing rules. There are rules aimed at preventing people from doing this known as the “deprivation of assets” rules. Where these rules apply, the local authority can include the value of the gifted asset when they carry out the means assessment. The “deprivation of assets” rules are complex and specialist legal advice should always be taken on whether or not they will apply.
Those considering gifting their home must also consider the possible significant impact of the gift on their future financial security and independence. With careful drafting of the document, a trust can address some of these concerns. However, the deprivation of assets rules can still apply.
The tax consequences of a gift (whether outright or to trust) must also be carefully considered. Such a gift can in some circumstances trigger immediate tax charges and/or increase your future tax exposure and/or that of your estate. You should always take professional advice before deciding to give away your home or a share in it, both as to whether the gift will achieve the intended objectives and what the legal and tax consequences will be.
Can I use my Will to protect my home from being sold to pay care home fees?
For married couples who do not wish to give away their home, one alternative is to leave the share in the home of the first spouse to die, to an appropriately worded trust under their Wills. While this won’t offer full protection, it will, in many circumstances, significantly reduce (and sometimes eliminate) the exposure to means assessment. Meanwhile, provided the trust is worded appropriately, the survivor can continue to occupy the property for the remainder of their life.
For the trust to work, the couple will need to hold the property as “tenants in common”, rather than as “joint tenants”. Where joint owners hold a property as joint tenants this means that the share in the property of the first to die automatically passes to the survivor. If they hold the property as tenants in common, each joint owner’s share passes under their respective Wills. Where a property is owned as joint tenants, it’s simple for a legal specialist to convert this to a tenancy in common, but you need to get it organised before the first death.
Example where share of home left to appropriate Will trust
The facts are the same as in the previous example above, except that John and Betty convert their ownership of the property, so they hold it as “tenants in common” in equal shares and John leaves his half share in the home to a trust under his Will. Under the terms of the trust, Betty has the right to occupy the home rent free for the rest of her life and John’s half share passes to their children after Betty’s death.
When Betty goes into care, her assets for means assessment purposes will include her own share of the home, but not the share held in John’s Will trust (because that doesn’t belong to her). Hence the share in the Will trust will be protected for the children. Also, the value of Betty’s share of the home for means assessment, is likely to be significantly lower than 50% of the total property value, because it’s the market value of the share that is assessed. The market value of a half share is likely to be much lower than 50% of the whole value, because a half share on its own will be much less marketable.
The Will trust approach also avoids many of the potential downsides of a lifetime trust. The deprivation of assets rules will not generally apply assuming (as will often be the case) that there has been no reduction in the value of anyone’s estate. The trust can be worded in such a way that the inheritance tax and capital gains tax consequences will be broadly similar to those that would apply if the property had been left outright. However, careful drafting and implementation is needed, or the tax consequences could be different. Before the death of the first spouse to die, the trust has no effect, so you can deal with the property as you wish.
One relevant consideration is that, by using a Will trust, the survivor will not be entitled to the capital of the share of the first to die. This will deter people who want absolute control over the home after the first death. Ways to mitigate this include:
- the trust can include powers to advance capital at the discretion of the trustees if desired
- the survivor can be appointed as one of the trustees so that they are involved in decisions while they have capacity
- the terms of the trust can also give the survivor the right to require the trustees to join in the sale and purchase of a replacement property if they wish to move.
Please be aware that the Will trust route will not provide protection if both spouses have to go into care during their joint lifetimes (because the trust does not apply until first death). However, if only one spouse has to go into care during their joint lifetimes, the home would not generally be taken into account for means assessment, provided the other spouse is still living there.
Can I use a Deed of Variation to protect my home from care home fees?
You may have heard that beneficiaries of a Will can vary the terms of the Will (or the destination of a property inherited as surviving joint tenant) within two years of death, by making a Deed of Variation. However, Deeds of Variation can be subject to the “deprivation of assets” rules. So, if you decide to change your Wills, it’s better to do so during your joint lifetimes rather than relying on Deeds of Variation.