A reader writes:
When our father died he left his half of my parents’ home to my brother and me in equal shares.
Our mother is still alive but has dementia and may need to go into a care home in the near future.
Some friends have offered advice on how to protect mother’s share of the house to avoid paying fees, as we would like the proceeds of sale to go towards paying for some luxuries for her.
Both of our parents worked and paid tax all their lives and want their children to benefit from their hard work.
My brother, in particular, has been unlucky with investment for his pension.
It has been suggested that we set up a trust fund. It has also been suggested that mother should sign over her share of the house to us now and that, as each of our shares will be worth approximately £60,000, neither of us would incur inheritance tax.
Is this correct?
Annie Shaw replies:
Since your mother already has signs of dementia, it is unclear whether she has the mental capacity to enter into a legal arrangement such as the sale or transfer of property.
The Alzheimer's Society website has information about the provisions of the Mental Capacity Act 2005, which may throw some light on this for you.
However, assuming your mother does still have capacity to act, you should be aware that anything she does to offload property or money in anticipation of needing care could be considered “deliberate deprivation of assets”.
In such a case, this would make the move ineffective in avoiding care fees.
Learn more about Saga's care funding advice service...
Deliberate deprivation to avoid care fees
If your mother gives away the house, or sells it six months or less before she goes into care, the local authority would automatically deem this to be deliberate deprivation and use the NHS and Community Care Act 1990 to reverse the sale or gift.
If the sale or gift was made more than six months prior to care being needed, and the local authority finds that deliberate deprivation has taken place, it can simply ignore the avoidance arrangement and assess your mother, as if she still owned her share of the house.
Since you say that you are already considering care for your mother, and are seeking advice precisely on the point of how to avoid fees, there is no doubt that your mother’s lack of assets after any manoeuvre undertaken now could be ruled as deliberate deprivation.
Had you been asking for advice several years ago, when your mother was fit and well and had no anticipation of care, then the situation might be different.
Note that there is no specific period beyond which the local authority cannot look when seeking to determine if deliberate deprivation has taken place (as, for example, there is for the taxman with gifts that avoid inheritance tax – see below).
If you sell the house now, the share of the cash released that belongs to your mother would be part of her assessable assets for care fees purposes.
Can you avoid care home fees?
Since, however, you and your brother already own half the house, as long as you continue to own it and don’t sell it, thereby releasing cash, the local authority might disregard your mother’s share when assessing her liability to pay her own care fees – as, the argument goes, you can’t sell half a house so it has nil value.
Increasingly, cash-strapped local authorities are finding ways to access the value of jointly-owned homes, and it is possible that they might offer to buy the house themselves, putting a charge on it until they can get vacant possession.
You might like to inquire about the policy of your mother’s local authority in respect of jointly-owned property.
What you need to know before signing property over to your children.
Inheritance tax is levied on the value of estates, not on the bequests to individuals
Whether IHT would be due after your mother’s death on the value of her portion of the house, should it be signed over to you or placed it in a trust, would depend on the size of your mother’s estate in total and whether she survived seven years after making the gift.
IHT may never become an issue if her estate is likely to be small. Alternatively, if her estate is over the so-called “nil rate band” and your mother doesn’t live seven years after giving the house away, the value of your mother’s share of the house could be fully liable to IHT, depending on whether other reliefs are available or not.
The nil rate band currently stands at £325,000. Under the rules that allow an unused allowance to be transferred in whole or in part to a spouse or civil partner, your mother’s allowance – assuming she was married to your father – would be £325,000, plus the residue of your father’s allowance - after deducting the value of the bequest of his share of the house to you and your brother, and any other non-exempt bequests.
Beware capital gains tax
The share of the house that you own will be liable for capital gains tax when you sell the property or otherwise transfer ownership since, if you don’t live in it, it is not your principal private residence and is therefore not exempt.
You and your brother do, of course, each have annual allowances. So whether you would actually need to pay any tax would depend on the increase in value since you inherited the house, and whether this increase, added to any other taxable disposals during the year, exceeded these allowances.
You should consult a lawyer or other financial advice professional who specialises in estate planning and care fees to make sure you get advice properly tailored to your mother’s case.