Whose house is it anyway? A question of home ownership
The When They Get Older team recently read an article in the Telegraph highlighting how home ownership transferrals can be a bit tricky to organise in terms of tax and care planning.
Local councils have employed inspectors to investigate elderly who sign their homes over to their children. These inspectors have the power to reverse transfers of home ownership should they suspect the elderly of concealing their wealth in order to receive a more favourable council care calculation.
Peter Ewart, Senior Partner at Persell Ewart & Co. Financial Management, explains the situation and shares his advice for protecting your parents, and indeed yourself, from the scrutiny of such inspections.
Ask the right questions
The safest way to protect your parents against a council investigation is to start by asking yourself “is this in anyway going to be viewed as a deliberate attempt to avoid paying care costs?” If you’re in doubt it’s important to ask for professional legal advice and should this still leave you in doubt then it’s best not to do it!
Avoid a harsh judgement
‘Deliberate deprivation’ or ‘deprivation of capital’ (transferring an asset to avoid it’s inclusion in a care fees assessment) is something your parents should avoid as falling foul could be very costly and upsetting for the family concerned. Where a family has undertaken planning that might involve gifting the house or other assets then there appears to be no strict time scale but more a judgment on a case by case basis which will also vary with each local authority. An experienced solicitor in this field should perhaps be called upon if a challenge is made by a local authority.
Estate Planning
If there’s a genuine need for estate planning, possibly to mitigate the effects of Inheritance Tax then this needs to be planned very carefully to make sure there are sufficient resources retained to pay towards the potential cost of your parents’ care.
Joint Tenants vs. Tenants in Common
It’s legally possible for your parents to change the ownership of their property from Joint Tenants (both your parents own the whole property, it’s not divided into distinct shares) to Tenants in Common. By transferring to Tenants in Common both your parents own the whole of their home but each owns a set share which can be either half of the house or a defined percentage. If your parents own their home as joint tenants then if one partner dies, the other automatically becomes the sole owner of the home.
With Tenants in Common one of your parents can pass on their share to you, or another relative, in the event of their death, whilst your other parent can continue to live in the family home, passing on their share when they pass away.
It is also a way for couples who have put unequal deposits into a property to protect their share in case they split up, this can ease the fears of families gifting deposits to their children. Some couples (or relatives living together) are not married and so will not benefit from the transfer of their Inheritance Tax allowance (£325,000). They may wish to use Tenants in Common as a legitimate method of passing on some of their wealth to someone other than the person they share the property with.
(It’s perhaps worth pointing out that following changes to inheritance tax law in 2007, married couples and civil partners can pass on their individual inheritance tax allowance on death, currently £325,000 – creating the ability to bequeath up to £650,000 tax-free.)
Lasting Power of Attorney *
Where a Lasting Power of Attorney has been registered with the Court of Protection then an application to make a gift out of your parents’ estate is even harder as the Court will want to see clear evidence that there is more than sufficient capital to pay for the cost of care, assuming the worst case scenario. Their default is No!
*The writing of an LPA involves the referral to a service that is separate and distinct to those offered by St. James’s Place. LPAs and trusts are not regulated by the Financial Conduct Authority.
Benefiting from beneficiaries
If your parents own their home as Tenants in Common they can go one step further to avoid potential problems with property ownership transfers by willing their half of the home to a nil rate band discretionary trust (i.e. for 2013/14, no more than £325,000) and appointing you as a beneficiary. A trusted friend or relative can act as trustee for your parent.
When one parent dies, the trust accepts a debt equal to a share of your parents’ home worth up to the Inheritance Tax threshold (as above, no more than £325,000), which is repaid when your surviving parent passes away. In effect the part of the home owned by the deceased is lent to the surviving partner until they die.
This legal move can also help with your parents’ long-term care costs. As long as one of your parents is still living in their home the council can’t include its value in the means test if your other parent has to go into a care or nursing home. With Tenants in Common, that also applies if the partner still living at home dies while the other is in care, because their share goes into the trust – the value of the home is still effectively nil.
Ask an expert
As previously mentioned, it’s probably wise to consult a solicitor who has expert knowledge of protecting your parent and their estate including trusts, LPAs and plans as it can be complicated. In every case there should be clear written evidence as to the reason for the planning and that it was a deemed a priority over any possible deprivation of capital issue.
If you’d like to know more about protecting your parents and their estate call Peter on 020 7744 0253 or email him for more information.
Persell Ewart & Co Financial Management is a trading name of PEFM LLP and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website.
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Would act of the trustees of the nil rate band trust accepting a debt equal to the value of the property transferred to the surviving spouse result in a Stamp Duty Land Tax charge? I think it might! Other than that, it is a potentially neat solution to this problem.