Home Protection Plan

Family Asset Protection

Professional Advice

Professional advice is essential. This guide is for general guidance and information only. Specific situations require a tailored approach and there is no substitute for the appropriate advice. We offer a free no-obligation consultation to discuss your individual requirements. Please feel free to contact us if you would like to arrange an appointment.

The Home Protection Plan is an Interest in Possession Trust implemented and backed by a publicly traded corporate law firm. Our Home Protection Plan is one of the longest serving property trusts in the UK having protected thousands of homes over the past 20 years.

Introduction

Anecdotal evidence suggests that anything between 40,000 and 70,000 homes are sold each year to cover the owner’s care fees.

Parents are also seeing nest eggs built up as intended inheritances for their children decimated over short periods once in care.

With advance planning this need not be the case. There are ways to protect the family home for the next generation.

Many people wish to pass the burden of looking after their home to their children. Some no longer like paperwork.

Others are fearful of the consequences of mental incapacity.

Those who have in the past gone through the probate process wish to minimise the workload for their children after their deaths.

This guide highlights the opportunity for planning, briefly describes some of the relevant considerations and suggests a simple strategy to protect the family home.

This is a highly specialised area. Local authorities around the country are experiencing severe financial constraints in funding care. This in turn leads to more aggressive assessment and the failure of steps taken too late.

What is the home protection plan?

The Home Protection Plan is a strategy designed for homeowners, whether single or couples, usually living on their own, to put the home beyond the reach of contributing to care fees and to achieve one or two other benefits set out later in this document.

The strategy involves the transfer of the home to a trust. Under the trust the settlor (donor/transferor) is an interest in possession beneficiary. Once the trust is created, he, she or they can continue to enjoy the home in the same way as before.

They can continue to live in the home for the rest of their life or lives or for as long as is wished and this is guaranteed.

The trust gives a guaranteed right of residency and security of tenure for life or until the point where continued residence in the home is no longer required or appropriate.

The background

Many elderly people are looking for ways of protecting their estate to pass it on to the children and to avoid it being wiped out by care home fees, and at the same time make the process simpler and more manageable for their children.

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 six 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.

The basic position

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 £23,250 no contribution will be made by the local authority.
• Below capital of £14,250 a full contribution will be made by the local authority.
• Capital between £23,250 and £14,250 there is a partial contribution made by the local authority.

(These are the applicable limits in England. In Wales there is a single capital limit of £24,000)

Virtually all income is assessable. The principal exception relates to part of an occupational pension in certain circumstances. A small amount of income (currently £24.90 per week in England and £26.50 per week in Wales) 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. 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. There are nil rate band restrictions that need to be considered here.
• 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 lifetime nil rate bands – currently £325,000 for single people and £650,000 for married 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 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 currently 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 deliberate deprivation rule through one of two routes:
1. 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 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.
2. 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 limit 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 point 2.

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:
• Bankruptcy - the child may go bankrupt and the house became available to the child’s trustee in bankruptcy.
• Divorce - the home may be the subject of the child’s divorce settlement.
• 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)

Placing the home into the trust amounts to a chargeable lifetime transfer (gift) for IHT.

However, so long as the gift into trust is within the nil rate band or nil rate bands (currently £325,000 for an individual, and £650,000 for a couple) there will be no actual charge to IHT. The home remains on the parents’ balance sheet for IHT. This means that on death, or second death, the home is treated as part of the estate by virtue of reservation of benefit. The home will only be taxed on death, or the second death, if when added to the rest of the estate it exceeds the relevant nil rate band or bands. So long as the estate is left to the surviving spouse there is no charge to inheritance tax on the first death. For the avoidance of doubt, even though the nil rate band will have been used to shelter the gift from IHT on entry into the trust, the nil rate band will nevertheless be available on each death (or second death).

From April 2017 the standard nil rate band will be supplemented by the residential nil rate band. The residential nil rate band will commence at £100,000 and will increase annually by £25,000 until it reaches £175,000 in April 2020. Potentially therefore there will be a total nil rate band of £500,000 (for an individual) or £1,000,000 (for a couple) available on death. The principal qualification is that the residential nil rate band is capped at the value of the property or share in the property. The residential nil rate band will usually be available in respect of commonly used versions of the Home Protection Plan. It may not be available in respect of one or two esoteric versions of the Home Protection Plan. Advice should be sought.

Trusts are potentially subject to inheritance tax on each 10 year anniversary. This is at a maximum rate of 6% and is only relevant above the nil rate band. Historically the increase in the nil rate band has tended to exceed house price inflation. However, currently the nil rate band is frozen until 2021.

From 2021 it will continue to increase but the rate is not yet known. If a property going into a Home Protection Plan is sheltered by the nil rate band but increases in value beyond the relevant nil rate band at the 10 year anniversary, there is a risk of a small inheritance tax charge, in approximate terms 6% of the surplus above one or two nil rate bands. If this is a concern then the amount of the home going into the Home Protection Plan can be limited to allow a greater margin for growth in value.

Capital Gains Tax (CGT)

The strategy is entirely neutral for 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 following entry into care or when replacing the home. If the home is sold by the children shortly after the parents’ death then in practice there should be no CGT. However if the home is retained by the children, say as a rental property, then there may be CGT to pay on an eventual sale based on the gain from the value at the date of death or second death.

Stamp Duty Land Tax (SDLT)

The strategy is entirely neutral for SDLT.

There is no SDLT to pay when the home is put into the trust as no payment is changing hands. It is a transfer into trust for zero consideration and therefore does not attract SDLT.

On 1 April 2016 an SDLT surcharge was introduced for the purchase of certain dwellings such as second homes and investment properties. The new surcharge works by increasing the current SDLT bands by 3% points: so the 0% band becomes 3%, 2% becomes 5%, 5% becomes 8% and so on.

Once you have placed your home into the Home Protection Plan you are guaranteed a right to occupy your property for life, or receive a trust income from the property if, say, it is rented out in the future. A beneficiary of this kind of trust is treated as owning the property personally. This means that if you sell the Home Protection Plan property and purchase a new property, then the additional SDLT surcharge will not apply. However, if you buy an additional property personally the additional rate could apply to this transaction. Because of this there should be no impact on your chosen trustees purchasing their first residence, or any additional residence, as you simply look through the trust and treat the beneficiary i.e. you, as owning the property.

This is not the case for other kinds of trust and specialist advice should be sought when dealing with any other kind of trust.

Other benefits

If there are other assets in the estate and inheritance tax is payable, the fact of the home being in a trust can be of significant cash flow benefit.

Generally on death an estate is frozen. In the case of property there can be no sale or transfer until the Grant of Probate has been obtained. To obtain a Grant of Probate it is necessary to pay some or all of the inheritance tax upfront ie at a time when the property cannot be sold. If the property is in the Home Protection Plan trust then the trustees are able to sell the property immediately after death without a Grant of Probate. This may assist in meeting the inheritance tax required to be paid upfront.

Probate

Where a person leaves a will, it cannot simply be taken out of the drawer, be relied on and be used to pass assets to the stipulated beneficiaries after death.

It first has to be submitted to the Probate Registry and a document called a grant of probate issued to the chosen executors named in the will. The grant of probate does two things. First, it confirms the validity of the will. Secondly, the grant of probate confirms the authority of the executors to deal with the estate of the deceased. On death a person’s estate is normally frozen. Banks will not operate bank accounts pending probate and the Land Registry will not allow any transfers pending probate.

In respect of the home, once a grant of probate has been obtained the executors can either sell the property or transfer it to beneficiaries.

The grant of probate confirms to the Land Registry that the executors have the authority effectively to stand in the shoes of the deceased and therefore sign a transfer of the property, whether that be by way of sale or to a beneficiary of the will.

Probate can be a burden and possibly time consuming, and relatively expensive if professional assistance is required. It is not untypical for a grant of probate to be issued say 3 months after the date of death.

Many parents prefer not to put their children through the rigours of the probate process after their deaths. The Home Protection Plan can help in this regard. Because the home is transferred into the legal ownership of the trustees of the Home Protection Plan it is not formally part of the estate on death and therefore is not subject to the probate process. The trustees are able either to sell the property, or transfer the property to the stipulated beneficiaries, or where the home has previously been sold they are able to transfer the proceeds of sale to the stipulated beneficiaries, immediately after death and without any regard to the probate process. As a minimum, if the property is to be sold following death there is no delay while probate is obtained.

In some cases the Home Protection Plan will eliminate completely the need for a grant of probate to be obtained. In other cases a grant of probate will still need to be obtained, albeit only for the minor part of the estate. Where the rest of the estate is relatively modest some institutions such as banks have informal procedures which can be used in place of the formal probate process in order to pass assets to the beneficiaries.

Typically this might be in respect of bank accounts containing less than £5,000.

First registration

The titles to most properties in this country are registered ie the details are recorded at the Land Registry.

Historically, ownership was recorded by a document called a Land Certificate which would accompany a parcel of documents referred to as title deeds. In recent years the Land Registry has undergone a process called dematerialisation with the purpose of ensuring that all land becomes registered land at some point in the future.

Details of registered titles can be accessed on line and the Land Registry now issue one document called a Title Information Document to record ownership. Solicitors dealing with property now simply access details of the title through a computer link with the Land Registry.

If property is not registered at the Land Registry then the transfer of property into the Home Protection Plan will trigger compulsory first registration. Dealing with the first registration will involve an additional fee over and above our standard fee. The Land Registry will also charge a fee according to the value of the property and this is higher than the fees for transferring registered property.

Leasehold property

There are two types of ownership of property in England and Wales, which are freehold and leasehold.

The freehold interest in land is the most complete interest and it means the outright ownership of land or property for an unlimited period.

On the other hand, a leasehold interest is a temporary right to occupy land or property but albeit this is a temporary right, it may last for decades. A person who owns the freehold interest in a property may grant a lease on it to another person. This creates a relationship of landlord and tenant (or lessor and lessee). The lease will often be a lengthy, written, legal document based on property and contractual law which sets out the rights and obligations of both the landlord and tenant.

It is not unusual for there to be certain obligations under the lease which have to be complied with when transferring a property into a Home Protection Plan. There may be additional fees and disbursements in relation to dealing with these obligations. Each lease is property specific so the fees cannot be ascertained until the lease is reviewed. It is also not unusual for the lease to provide a set of fees which are out of date. Landlords will have to be contacted to see what the correct level of fees are.

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