Whether you are responsible for paying for care-home fees depends on the assets you have accumulated throughout your life. Whilst reducing your belongings to avoid or limit these costs may be tempting, deliberately depriving your assets is a criminal offence and could impact your entitlement to council funding.
In 2022, there were 408,371 people living in care homes in the United Kingdom. According to the Office of National statistics, 37% of residents were self-funded, using their hard earned savings to cover the cost of care.
As the new labour government announces the scrapping of planned reforms on care costs introducing a cap to the amount you pay, we look more closely at the topic of deprivation of assets, how the cost of care could deplete your life savings and what you can do to mitigate the impact.
What is deprivation of assets?
Before you move into a care home, the local authority carries out a means test to determine how much of your assets, including property, savings and income can be used to pay for care. If your assets exceed the current threshold of £23,250, you’ll be expected to contribute towards your care costs.
Deprivation of assets is when you deliberately reduce your assets to avoid or minimise the amount you pay for care. This could include:
- Transferring your property to someone else
- Selling assets for less than their market value
- Sudden unusual spending of large amounts of money
- Extravagant spending such as gambling
- Giving away large sums of money perhaps as a gift
- Assets placed into a trust that cannot be revoked
- Assets used to purchase an investment bond with life insurance
- Buying expensive items
- Giving away or selling the right to income from a workplace pension
What is the impact of care home costs on assets?
Care home costs can quickly deplete your life’s savings. Leading care home review site carehome.co.uk states that in 2024, the average weekly cost for a self-funded residential care home is £1,160 or £4,640 a month, and even higher for a nursing home where more specialist care is required.
To put the total cost of care into perspective, the Office of National Statistics (ONS) latest report shows the average life expectancy for female care home residents ranged from 7 years for 65 to 69 year olds to 2.9 years for those over 90, with males slightly lower at 6.3 and 2.2 years respectively.
With annual fees averaging more than £55,000, the impact to any life savings you may have could be huge.
How do local authorities detect deprivation of assets?
Local authorities are vigilant when it comes to detecting deprivation of assets. They will investigate any substantial financial transactions made in the years leading up to the care home admission. If they believe assets have been deliberately reduced or hidden, they can include them in the means test as if they were still owned by the person in care. This process is known as "notional capital."
Deprivation of assets 7 year rule
Don’t be fooled by the ‘7 year rule’ myth that some people believe applies to deprivation of assets. This time frame only applies to inheritance tax rules, there is no limit on how far back authorities will look into your finances if they suspect you have deliberately reduced your assets.
Are there legitimate ways I can reduce my assets?
There are legitimate ways to reduce your assets, such as gifting money or property to loved ones, placing assets in a trust and buying a prepaid funeral or direct cremation plan. The key is timing and intent. If your actions are part of a long-term estate planning strategy, they are less likely to be viewed as deprivation of assets. However, if they are carried out shortly before you move into care, you may come under scrutiny.
Planning ahead to protect your assets
- The role of estate planning
Estate planning plays a crucial role in managing your assets effectively and legally. By planning well in advance, you can ensure that your assets are distributed according to your wishes, while also considering the potential need for care. Estate planning often includes drafting a will, setting up trusts, and making gifts—strategies that, if done correctly, can protect your assets from being swallowed up by care home fees.
Timing is everything when it comes to reducing assets. If you begin planning early, while still in good health, any gifts or transfers you make are less likely to be viewed as deprivation of assets. For instance, a 56-year-old setting up a trust for their children is less likely to face scrutiny than a 80-year-old doing the same shortly before needing care. The latter could be seen as a deliberate attempt to avoid care costs, which could backfire.
Setting up a trust or gifting assets can be effective tools for managing your estate, but they come with caveats. Trusts can protect assets from being counted in the means test, but they must be set up properly, and the timing is critical. Gifts, on the other hand, are more straightforward but are subject to the "seven-year rule" for inheritance tax purposes. If the gift is made more than 7 years before death, it’s exempt from inheritance tax. However, if a gift is made in anticipation of needing care, it could still be considered deprivation of assets.
- Prepaid funeral and direct cremation plans
One of the few expenditures that are typically allowed when considering deprivation of assets is a prepaid funeral plan or direct cremation plan. Since everyone inevitably needs some form of funeral, local authorities generally accept this as a valid expense. Prepaid funeral plans can be a smart way to reduce your assets while also locking in current prices, which can be a significant saving if funeral costs continue to rise.
- Where do I go for advice on the complexities of deprivation of assets
Solicitors and financial planners play a vital role in helping you manage your assets effectively. They can provide advice on the best ways to structure your estate, set up trusts, and make gifts that are less likely to be challenged by local authorities. Their expertise can help you avoid common pitfalls and ensure that your estate is managed according to your wishes.
Consulting with a solicitor or financial planner who specialises in later life and estate planning is crucial. They can guide you through the process, ensuring that your actions are legal and that your assets are protected as much as possible.
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