THE BACKGROUND to Home Protection Plans.

Home protection plans are designed to help the many older folk desperately looking for ways of protecting their estate to pass it on to the children and grandchildren and to avoid it being wiped out by probate and care home fees.

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.

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THE BASIC POSITION for Home Protection Plans

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 £23,000 no contribution will be made by the local authority.
Capital below £14,000 a full contribution will be made by the local authority.
Capital between £23,000 and £14,000 there is a partial contribution made by the local authority.

Virtually all income is assessable. The principal exception relates to part of an occupational pension in certain circumstances. A small amount of income (currently £21.90 per week) 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 – usually £325,000 for single people and £650,000 for 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 appropriate deprivation rule through one of two routes:

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.

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 limits 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.

Solutions and partial solutions are available from less than £400, though the top of the range solution costs a little over £1,950 - but could save far more than that in probate fees, never mind the protection from creditors.

- we have a free information pack, but we do give a free 5 minute appraisal to make sure you aren’t wasting your time reading it! You will need to include your phone number.

Other sites which may be of interest:
Probate and Trust Management - The Probate Department Ltd
Wills and Lasting Powers of Attorney - Allied Professional Will Writers Ltd
Will Storage & Review - Will Custodian Ltd
Inheritance Tax Secrets ebook
Legal & Financial Planning Secrets ebook
Asset Protection Secrets ebook

Information for Financial Advisers?

Allied Professional Will Writers Ltd Co reg: 5250176

2 Hankham Street Hankham Pevensey BN24 5BG

0800 298 5208 or go here.

Background to Home Protection Plans