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Introduction

 

Anecdotal evidence suggests that anything between 40,000 and 70,000 homes are sold each year to cover the owner’s care fees.

 

Parents are also seeing nest eggs built up as intended inheritances for their children decimated over short periods once in care.

 

With advance planning this need not be the case. There are ways to protect the family home for the next generation.

 

Many people wish to pass the burden of looking after their home to their children. Some no longer like paperwork. Others are fearful of the consequences of mental incapacity. Historically this issue could be dealt with by giving the children (or others) an enduring power of attorney. These were relatively simple and cheap. On the onset of mental incapacity it could be registered and used. In contrast, the current lasting powers of attorney are expensive and time consuming.

 

Those who have in the past gone through the probate process wish to minimise the workload for their children after their deaths.

 

This guide highlights the opportunity for planning, briefly describes some of the relevant considerations and suggests a simple strategy to protect the family home.

This is a highly specialised area. Local authorities around the country are experiencing severe financial constraints in funding care. This in turn leads to more aggressive assessment and the failure of steps taken too late.

 

Professional Advice

 

Professional advice is essential. This guide is for general guidance and information only. Specific situations require specific advice and this guide is no substitute for the appropriate advice.

 

What is the Home Protection Plan?

 

The Home Protection Plan is a strategy designed for homeowners, whether single or couples, usually living on their own, to put the home beyond the reach of contributing to care fees and to achieve one or two other benefits set out later in this document. The strategy involves the transfer of the home to a trust. Under the trust, the settlor (the donor/former homeowner) is also a beneficiary so that once the trust is created he, she or they can continue to live in the home for the rest of their life or lives or for as long as is wished, on a guaranteed basis. The trust gives a guaranteed right of residency and security of tenure for life or until the point where continued residence in the home is no longer required or appropriate.

 

The trust is the new owner of the home and therefore the home should no longer count as a capital resource. Despite the fact that the trust now owns the home, the former homeowner(s) still have flexibility. As well as rights of residence and security of tenure, there is the flexibility to move to a smaller (or cheaper) property and to retain all rights of residence and security of tenure in the new home.

 

The Background

 

Many elderly people are looking for ways of protecting their estate to pass it on to the children and to avoid it being wiped out by care home fees, and at the same time make the process simpler and more manageable for their children.

Giving the home away to the children is sometimes seen as the solution (not to be recommended).

 

There is also the misconception that if you give the home away at least 6 months before going into care, the local authority cannot touch it. There is a so called “six month rule” in the legislation but this is a rule applicable to a specific circumstance and should not be relied on. In the real world, many local authorities have rules of thumb; some will only look back over one or two years but others may look back over a much longer period. “Deliberate deprivation” is a relevant concept and makes things more difficult.

 

Cash strapped local authorities are cracking down on people who they think are trying to avoid paying care fees and they are becoming increasingly sceptical about people saying gifts were made due to the natural love and affection for their children. This guide covers these various points briefly and highlights a simple and uncomplicated approach to sheltering the family home through a recognised planning technique, which has a track record.

 

The Basic Position

 

Those who cannot afford to pay privately for care must look to the local authority for funding or assistance with funding. The resident has a free choice of home, subject only to the fee level quoted, which is usually within the funding arrangements available to the local authority.

 

Both income and capital resources are assessed.

• Above capital of £23,250 no contribution will be made by the local authority.
• Below capital of £14,250 a full contribution will be made by the local authority.
• Capital between £23,250 and £14,250 there is a partial contribution made by the local authority.
(These are the applicable limits in England. In Wales there is a single capital limit of £22,000.)

 

Virtually all income is assessable. The principal exception relates to part of an occupational pension in certain circumstances. A small amount of income (currently £22.30 per week in England and £22.50 per week in Wales) is not assessed, amounting to little more than pocket money. This is literally intended to cover toiletries, hairdresser  etc.

 

This guide concentrates on the family home. It is not a guide to other potentially assessable capital.

 

Advice on other capital is available on request.

 

The Home

 

The starting position is that the home counts as capital for financial assessment purposes. The value of the home, or an interest in it, is taken account of as a capital asset. It comes into the reckoning for means testing at its market value, less 10% (assumed costs of sale) and less any mortgage liability. Once sold, the home simply comes in as cash.

The home is disregarded under certain circumstances:

• During the first 12 weeks of care.
• During temporary or respite care.
• If it is occupied by a husband, wife or unmarried partner.
• If it is occupied by a close relative over the age of 60 (or under the age of 16).
• If it is occupied by a relative under the age of 60 who is disabled.

 

The local authority may, at its discretion, ignore the value of the house if it is the permanent home of a carer, or in one or two other limited situations. Clearly the local authority’s discretion ought not to be relied on.

 

The Solution

 

The solution is to ensure that the home is not personally owned on entry into care. The local authority’s financial assessment can then legitimately and properly be completed on the basis that the home is not a capital resource of the resident.

The solution involves putting the home into a trust, so that the trustees are the owners.

 

Features of the trust are:

• The former owner has a guaranteed right of residence in the property for the remainder of his or her life. The trustees, usually the children, cannot evict the former owner in any circumstances.
• The former owner has the ability to direct the trustees to sell the property and to buy a new property of the former owner’s choice. The former owner can therefore move property or trade down. The trustees have no choice in the matter. Of course in the rare circumstance where the new property might be more expensive, the trustees can only
be required to buy the new property if the additional capital needed is provided by the former owner.
• If the property is sold, for whatever reason, and a new property is not bought, usually on the former owner entering care, then the proceeds of sale will be invested and the former owner will receive the interest or income earned on the invested capital.
• On the death of the former owner (or second of two former owners), but not before, the property, or its proceeds of sale, passes to the chosen beneficiaries; the trust at that point operates similarly to a will.

For whom is the Home Protection Plan suitable?

The Home Protection Plan is suitable for:
• Usually those from the mid 60s upwards.
• Both single people and couples. The plan is usually even stronger if entered into while both of a married couple are still alive (as the home would in any event be disregarded if one of the couple went into care).
• Those for whom care fees are a more significant issue than inheritance tax.
• Those whose property is worth no more than the available nil rate bands - currently £325,000 for single people and £650,000 for married couples.
• Those in reasonable health.
• Those for whom entry into care is not in contemplation or on the horizon but is only a distant possibility, the usual possibility at the back of everyone’s mind.

The Home Protection Plan is not suitable for:
• Those under 60-65 (usually).
• Those who may require access to the capital value reflected in their home.
• Those with pensions or incomes which will in any event cover the costs of care and therefore sheltering the home has no benefit, though bear in mind the potential rises in cost of care as against sometimes fixed incomes.
• Those for whom care is a foreseeable possibility.

 

No Access to Capital

 

For the complete avoidance of doubt, the Home Protection Plan is only suitable for those who wish to pass the home to the control of trustees, who want guaranteed occupation for the rest of their lives and subject to that want their home to pass to their children or other chosen beneficiaries. It is not suitable for those who may want access to the capital locked in their homes, whether that be by equity release or on a sale of the home in the future.

 

Married Couples

 

The trust described above is equally applicable to married couples as to single owners. In fact, married couples entering into the strategy will have the additional advantage that they do so at a time when if one of them went into care, the home would in any event be disregarded due to the other spouse still living in it.

 

Deprivation

 

Local authorities have a number of remedies available to them to counter planning in certain circumstances. The primary remedy available to local authorities is “deliberate deprivation”. A local authority may treat a resident as possessing the home, or an interest in the home, if it can show that the resident deprived himself or herself of the home for the purpose of decreasing the amount that he or she may be liable to pay for his or her care accommodation i.e. the local authority can still treat the resident as owning the home and can financially assess the resident accordingly.

Anyone contemplating using this strategy can avoid the deliberate deprivation rule through one of two routes:
A. Through the passage of time after the transfer into trust. The time elapsed between putting the home in trust and entry into care may be of such a length that the local authority realistically cannot show deliberate deprivation. The absolute minimum would be two or three years but there is no set period or no period in respect of which a guarantee could be given.
B. Through putting the home in trust at a time when entry into care is simply not an issue, is not on the horizon and is not currently something reasonably foreseeable as something that might happen. The planning relies on this scenario; that the home is put in trust at a time when entry into care, and the financial consequences which might follow, is simply the usual distant worry that most homeowners have at the back of their mind even though still only a minority of the population end up in care.

 

Time Limit

 

There is much misinformation in circulation of various safe time limits. A typical example of the confusion is that a gift of the home will be safe from assessment by the local authority from 6 months, 1 year, 2 years, 3 years, even up to 7 years (the latter being very often confused with the relevant IHT risk period) prior to entry into care.

 

The most dangerous time limit suggested by various advisers is 6 months, which is presumably drawn from the legislation. However, anyone relying on that time limit is taking a very big risk in presuming this time limit will be acceptable to the local authority.

 

The answer is to make the necessary arrangements at a point well in advance, as set out in B above.

 

Planning in Advance

 

If planning is done well in advance then the various remedies and anti avoidance provisions available to the local authority can be avoided. The question is simply whether the measures taken ensure that assets are not brought within the financial assessment on entry into care.

 

Until the first death the family home carries a “disregard” status, therefore any planning undertaken while both spouses are alive is even more likely to be secure from local authority attack. If a husband and wife undertake long term planning while both are alive, their planning should usually be successful.

 

Risks

 

Comment was made earlier about the possible folly in gifting the home to the children.

 

The risks are immense:
• Divorce - the home may be the subject of the child’s divorce settlement.
• Bankruptcy - the child may go bankrupt and the house become available to the child’s trustee in bankruptcy.
• Pre-decease - if the child dies before the parent, the ownership of the home may go off in the wrong direction (eg to son or daughter in law).
• Sale - the house will be the children’s to sell.
• Finance - a child could attempt to raise finance on the house.
• Pressure - children notoriously consider the parent to be ready to enter care long before the parent themselves.
• There are numerous other reasons.

The trust strategy described by this guide avoids these risks.

Inheritance Tax (IHT) and Capital Gains Tax (CGT)

The trust strategy is entirely neutral for IHT and CGT.

• CGT - there is no CGT to pay when the home is put into the trust (due to main residence relief) and there is no CGT to pay when the home is sold by the trustees after entry into care or by the children after the parents’ deaths (due to the trust version of main residence relief).
• IHT - in the trust, the home remains on the parents’ balance sheets for IHT. For married couples using the trust strategy, the strategy is compatible with the use of two IHT nil rate bands (currently 2 x £325,000 = £650,000) for IHT planning. Further advice should be sought.

 

Other Benefits

 

The Home Protection Plan offers the significant benefit that the home will no longer be subject to probate on death.

 

The home can be sold or transferred by the trustees immediately after death with no probate formalities at all. This is potentially a significant advantage. In some cases, depending upon the other assets of the estate, it may mean that probate can potentially be dispensed with completely, with consequent time and cost savings.

 

The Home Protection Plan is also for some parents a possible alternative to Lasting Powers of attorney.

 

Lasting Powers of Attorney

 

Many people are concerned about the ramifications of the onset of mental incapacity later in life.

 

Historically this problem could be addressed through the use of an enduring power of attorney. An enduring power of attorney was a document by which the parents gave power to the attorney(s) (typically the children) to deal with their financial and property affairs after they, the parents, had become mentally incapable. After the onset of mental incapacity enduring powers of attorney could only be used if registered with the Court of Protection. This was then a relatively simple and cheap 30 day postal procedure. Following a recent change in the law new enduring powers of attorney can no longer be put in place.

 

The new version of the enduring power of attorney is the lasting power of attorney. While lasting powers of attorney are more expensive, the alternative in the event of mental incapacity may be on application to the Office of the Public Guardian. On the onset of mental incapacity in the future then those concerned (usually the children) can apply to the Office of the Public Guardian for authority to take control of their affairs. Albeit the process is generally a postal one, the process can take 3 or 4 months and be relatively expensive.

 

The Home Protection Plan is a viable alternative to a lasting power of attorney only in respect of the home. The home will be registered at the Land Registry in the names of the trustees (typically the children). Mental incapacity of the parents will therefore be irrelevant to the ability to sell or rent the property. If the property is to be sold then the selling party will be the trustees.

 

Even in the absence of mental incapacity, the fact that the selling parties will be the trustees (typically the children) will be attractive to many parents. Many parents no longer wish to be bothered with paperwork and are attracted to the idea of responsibility for and management of their home being in the names of, and therefore in the hands of, their children.

 

Probate

 

Where a person leaves a will, it cannot simply be taken out of the drawer, be relied on and be used to pass assets to the stipulated beneficiaries after death. It first has to be submitted to the Probate Registry and a document called a grant of probate issued to the chosen executors named in the will. The grant of probate does two things. First, it confirms the validity of the will. Secondly, the grant of probate confirms the authority of the executors to deal with the estate of the deceased. On death a person’s estate is normally frozen. Banks will not operate bank accounts pending probate and the Land Registry will not allow any transfers pending probate. In respect of the home, once a grant of probate has been obtained the executors can either sell the property or transfer it to beneficiaries. The grant of probate confirms to the Land Registry that the executors have the authority effectively to stand in the shoes of the deceased and therefore sign a transfer of the property, whether that be by way of sale or to a beneficiary of the will.

 

Probate can be a burden and possibly time consuming, and relatively expensive if professional assistance is required. It is not untypical for a grant of probate to be issued say 3 months after the date of death. Many parents prefer not to put their children through the rigours of the probate process after their deaths. The Home Protection Plan can help in this regard. Because the home is transferred into the legal ownership of the trustees of the Home Protection Plan it is not formally part of the estate on death and therefore is not subject to the probate process. The trustees
are able either to sell the property, or transfer the property to the stipulated beneficiaries, or where the home has previously been sold they are able to transfer the proceeds of sale to the stipulated beneficiaries, immediately after death and without any regard to the probate process. As a minimum, if the property is to be sold following death there is no delay while probate is obtained.

 

In some cases the Home Protection Plan will eliminate completely the need for a grant of probate to be obtained. In other cases a grant of probate will still need to be obtained, albeit only for the minor part of the estate. Where the rest of the estate is relatively modest some institutions such as banks have informal procedures which can be used in place of the formal probate process in order to pass assets to the beneficiaries. Typically this might be in respect of bank accounts containing less than £5,000.

 

First Registration

 

The titles to most properties in this country are registered ie the details are recorded at the Land Registry. Until recently the Land Registry issued a document called a Land Certificate, which most people would have regarded as their deed. In recent years the Land Registry has undergone a process called dematerialisation. Land Certificates are no longer issued by the Land Registry and Land Certificates have no intrinsic value as deeds. Instead, the entry on the Land Register is definitive. Details of titles can be accessed online. What the Land Registry will now issue is a
document called a Title Information Document, which is simply a print of the relevant title details held on the Land Register. Solicitors selling a property will now simply access details of the title through a computer link with the Land Registry.

Historically, deeds were unregistered. Each time a property was sold, the relevant conveyance would be added to the bundle of historical title deeds and on each sale and purchase, or other transaction, the relevant title to the property would need to be proved from the overall bundle of historical title deeds. The law is generally moving to eradicate unregistered titles. On most dealings with an unregistered property, the buyer or recipient is required to make a compulsory first registration of the title at the Land Registry so that henceforward the title will be registered and the historical deeds will have no further significance or value. Where homeowners currently have an unregistered title, then there will be an obligation on the trustees, after the property has been transferred to them, to make a compulsory application for first registration of the title. Alternatively, a voluntary registration of the title can be made ahead of entry into the Home Protection Plan.

 

Our fee for the Home Protection Plan is £2,200 plus any Land Registry fee which are typically between £50 and £90. If your home is unregistered then there will also be a First Registration fee from the Land Registry and ourselves of £400

 

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