The considerable cost of care is high on politicians’ agendas for the upcoming snap general election. A deadly duo of increasing life expectancy and the rising cost of care has the potential to leave too many people with an eye-watering bill in later life.
Planning ahead is necessary but when it comes to funding later life it can get quite complicated, particularly since the costs depend on several unknowns, such as how long a client is going to live.
The matter is exacerbated because of how local authorities calculate whether a person needs financial assistance for the cost of residential care.
People are only entitled to financial support if they have less than £23,250 in savings, property and other assets. The Care Act 2014 maps out the process of assessment, charging, establishing entitlement, care planning and the provision of care and support.
Treatment of investment bonds
The care and support statutory guidance specifically addresses investment bonds. Life assurance policies (single premium bonds and not redemption bonds) are typically excluded as assets when determining the value of assets an individual has for care purposes.
Take Doris, for example, who starts thinking about her retirement plans when she is 42. She decides to invest £50,000 into a single premium life assurance bond and takes no withdrawals.
When she reaches 86 she needs to go into care. At first, she pays for care herself but her funds slowly deplete and her family ask if she is eligible for financial support. When the local authorities consider her assets, the single premium life assurance would not be included based on the current guidance.
Withdrawals from investment bonds
However, the guidance also stipulates that certain capital payments should be treated as income. This includes “capital paid by instalment”, meaning an existing regular withdrawal facility from an insurance bond is likely to be included as income for the purposes of assessment.
So say, at age 80, Doris decides to request regular payments from her bond to help pay for her private physical therapy.
When she goes into care, she decides to keep her private therapist and have him visit her at the care home, meaning she continues to take withdrawals.
If she applies for financial support in this instance, they will take that “income” into account in her assessment and she may not be eligible until later on in her life.
But say Doris’ new care home offers its own physical therapist and she decides to cancel her private one and hence her withdrawals, the payment would not be part of the assessment.
That said, if a client does cancel withdrawal payments, it is crucial they can prove this is not what is deemed a “deliberate asset deprivation”.
Deliberate asset deprivation
Indeed, if someone gifts money or puts money into a bond in order to try and qualify for means-tested care, the council can reclaim fees on the basis this is a deprivation of assets.
This is because the council believes the person should have paid, even if they no longer have the money. Officers must consider whether avoiding care fees was a “significant motivation”. They must also take into account whether someone could easily foresee they would need that money for future care.
So, back to Doris. Say she starts thinking about how she is going to need care, and knowing the threshold for financial assistance is £23,250, decides to put most of her estate into a bond a few months before applying. For UK inheritance tax planning this could be appropriate planning.
However, if the council becomes aware Doris was motivated to put the money into a bond with the intention of trying to reduce her estate so she benefits from financial support, it could reclaim the value of the money.
So while the use of trusts is an appropriate estate planning strategy, they should not be used to deliberately avoid care. Indeed, councils are likely to be strict about deprivation of asset rules now they are faced with intense funding pressure.
That said, we may see the scope of assets considered extended in the future and, of course, different councils may take different views or interpret the application of the rules in different ways.
All in all, planning and timing is of upmost importance when it comes to funding for care, and this is more the case now than ever.
Rachael Griffin is tax and financial planning expert at Old Mutual Wealth