Can LAs seize property for long-term care costs?
Back in 2003, my 87-year-old father-in-law gifted his home to my wife and her brother. The home was valued at the time at £96,000 and it’s currently worth about £143,000.
At the time, the solicitor prepared a declaration of trust that gave my father-in-law the right to reside in the property for his life, on the basis that he will be responsible for all normal outgoings. But should my father-in-law be taken into care, will the local authority be able to lay claim to the value of the house to pay for it?
Ask The Professionals: Brian Williams, tax director at Vantis, says:
The gift by your father-in-law of his home to your wife and your brother-in-law was a lifetime gift, and this would rank for inheritance tax (IHT) purposes as a potentially exempt transfer once your father-in-law had survived that gift by seven years.
If the value of your father-in-law’s estate (including the value of the gifted property) is below the £312,000 IHT threshold at the time of his death, then there will be no IHT to pay. Were the house then sold, your wife and her brother would pay capital gains tax (after their individual annual exemption of £9,600) at 18% on the increase in value from the date the property was gifted to them until the date of sale.
There would be no other taxes to pay other than stamp duty.
However, there are clear anti-avoidance provisions, called the ‘gift with reservation of benefit’ rules contained in section 102 of the Finance Act 1986. These state that if a person makes a gift but derives a benefit either directly or indirectly from the gifted asset, then, for IHT purposes, it will continue to form part of that person’s estate - even though the asset had been given away.
If the reservation continues for seven years, it will be assessed as part of the estate at its value at the date of death, so little will have been achieved.
Through signing the declaration of trust it could well be that your father-in-law only gave away the freehold reversion to the property, retaining the right to live there for the rest of his life. This could fall foul of the ‘gift with reservation of benefit’ provisions because even though the property was gifted to his children five years ago, he still profits from living there.
If this is the case, the property would still be considered as part of your father-in-law’s estate upon his death.
I suspect that the real motivation of gifting the house was not so much IHT mitigation as protecting the value of the house from local care costs. Unfortunately however, if the local authority suspects this to be the case then it would be able to disregard the gift and make a claim to the value of the house to pay for his care.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Permanent and absolute ownership and tenure of a property (residential or commercial) and/or land with freedom to dispose of it at will but with no time limit as to how long the property/land can be held (in perpetuity). Freehold is the opposite of leasehold.