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| Potential Tax and Financial Pitfalls in Transferring the Family Home to Avoid Long Term Care Costs |
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TaxationWeb by Bob Fraser MBA MA FSFA Bob Fraser, MBA, MA, FSFA, Associate Investment Director, Rensburg Investment Management Limited, explains why gifting the family home for tax-efficiency or other reasons can have unfortunate repercussions in the assessment of means tested contributions for long term care costs A very common area of concern on this /forum/ centres on transfers of the family home. In many cases this has been done without proper advice, and with the intention of trying to avoid the home being taken into consideration in the assessment of means tested contributions for long term care costs.Deprivation of assetsIt is important that individuals understand the powers that local authorities have to include in the means testing assessment assets that they consider to have been subject to ‘deliberate deprivation’. A definition used by Age Concern is that “deliberate deprivation occurs when a resident transfers an asset out of his or her possession in order to put him or herself in a better position to obtain assistance”. The Department of Health’s Charging for Residential Accommodation Guide (CRAG) gives the following examples of deprivation:• a lump sum payment such as a gift or to pay off a debt; • transferring the title deeds of a property to someone else; • putting money into a trust that cannot be revoked; • converting money into another form that has to be disregarded from the means test, e.g. personal possessions, investment bonds with life insurance; • reducing capital through substantial expenditure on items such as expensive holidays or by extravagant living. TimingSection 21 of the Health and Social Services and Social Security Adjudications (HASSASSA) Act 1983 give the local authority powers to recover any sums which it has to pay towards an individual’s care costs from the person to whom an asset was transferred in cases where that individual has deliberately deprived him/herself of an asset. However, this power can only be used if the deliberate deprivation occurred within six months of the donor requiring funding.If more than 6 months have elapsed, this does not mean that the asset cannot be taken into account. It simply means that the local authority cannot use this section to recover costs. You should note that there is no time limit as to how long after any asset is given away that a Local Authority can still take them into account, so even the suspicion by the Local Authority that this could have been the reason for disposing of the asset could mean that gifting assets away fails. MotivationThe regulations accept that not all transfers are motivated by a desire to avoid long term care costs. Clearly the timing of the transfer is relevant, and the regulations specifically state that:‘The timing of the disposal should be taken into account when considering the purpose of the disposal. It would be unreasonable to decide that a resident had disposed of an asset in order to reduce his charge for accommodation when the disposal took place at a time when he was fit and healthy and could not have foreseen the need for a move to residential accommodation’. (CRAG, paras. 6.062 and 6.064). Notwithstanding this, many local authorities have a view that all older people ought to be considering that they might need long term care in the future. These local authorities will count any money given away as part of a person's assets, unless there is another strong reason for giving it away (for example to avoid inheritance tax). This motivation test can catch individuals who are seeking to make use of investment bonds (a commonly advised course of action), since paragraph 6.002B of the CRAG guidelines states that: 'Councils are advised that if an investment bond is written as one or more life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights has to be disregarded as a capital asset in the financial assessment for residential accommodation'. This clearly raises the issues of motive and timing. The decision to transfer one investment, say cash deposits, into an insurance bond for tax planning reasons (for example to avoid losing the age allowance) may be a perfectly legitimate decision if it is planned well ahead. However, it may be caught under the deprivation provisions if it is a last minute avoidance measure. Inheritance Tax (IHT) JustificationIt should be noted that if an individual gifts his/her home away, and yet continues to occupy it, this is deemed to be a “gift with reservation of benefit” for IHT purposes. It will therefore be disregarded by the Inland Revenue as a true gift, and the home will be included in the donor’s estate for IHT purposes. This means that an IHT motivation for the transfer cannot be justified as an excuse for making the gift.Capital Gains Tax (CGT) ImplicationsFurthermore, just to compound the misery, not only would the transfer fail to be convincing either for avoiding IHT or long term care costs, but unless the beneficiary of the transfer lives in the home as his/her principle private residence (PPR) there would also be adverse CGT implications. The transfer would be deemed to be at full market value, although no actual tax would be payable as the donor would be able to use his PPR exemption. But the donee would have this value as his base cost from the date of the transfer. When the home is eventually sold, he/she would be liable for CGT on any gain (after expenses, taper relief, and the annual allowance). Had the transfer not been made, this would have been avoided.The Way AheadThe aim of this article is to point out the risks in taking action without proper qualified advice. There are solutions, but these depend on each individual set of circumstances. The moral has to be: “take advice”.Email your enquiry April 2005 Bob Fraser, MBA, MA, FSFA Associate Investment Director Rensburg Investment Management Limited Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree. Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements. Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 02 April 2005 | 19801 Hits |
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