Care - a worry?

Lord Sutherland’s review of free personal and nursing care in Scotland, which was completed in April this year, concluded that “if our recommendations are accepted”, the policy “can be stabilised and maintained at the level originally envisaged for the immediate future”. However, one of the short term recommendations is that there must be a renewal of efforts to improve public information and understanding of the policy.

Having failed, after an hour of trying, to find a single document that comprehensively addresses the funding and eligibility issues for individuals in Scotland, it is no surprise to me that increasing numbers of clients have to ask their solicitors for this information. Those who are retired or close to retirement want to know what they will be entitled to receive and how they can protect their assets. If we are going to get the questions, we need to know the answers.

The detail

Free personal and nursing care (FPNC) was implemented in Scotland from July 2002 by the Community Care and Health (Scotland) Act 2002. By virtue of s 1 of this Act, personal care is defined in s 2 of the Regulation of Care (Scotland) Act 2001 as “care which relates to the day to day physical tasks and needs of the person cared for… and to mental processes related to those tasks and needs”.

People over the age of 65 who live at home and are assessed as needing such personal care services will receive them free of charge.

People over the age of 65 who live in a care home will have the first £149 of the weekly cost of their personal care services, and the first £67 of the cost of nursing care, paid for them. Self-funders will then be expected to pay for the remainder of the care home costs.

Whether or not an individual is a self-funder is determined by assessing that individual’s income, including pensions and any social security benefits, and capital, including savings, investments, property and any “notional capital”.

Those with capital in excess of £21,500 will be self-funders. Those whose capital amounts to less than £21,500 but more than £13,000 will be expected to contribute £1 per week for every £250 (or part of £250) that they have in excess of £13,000.

Those with less than £13,000 of capital will not have to make any contribution to the care home costs.

There are no income thresholds as such, but an individual who contributes to his or her care home costs will be entitled to retain any income that has been ignored in the financial assessment, plus their personal expenses allowance which amounts to £21.15 per week, and the savings disregard of £5.45 per week.

Clients want to plan for these potential costs and protect their assets. They will ask for our suggestions.

Notional capital

When considering asset protection, the first thought that many clients will have is simply to give their assets away before they need care. This raises the thorny issue of “notional capital”. Individuals can be assessed as still having assets they have disposed of if it is determined that they deliberately deprived themselves of the assets with the intention of reducing their contribution to care costs. This is likely to be particularly relevant in relation to the individual’s house, but will equally apply to outright financial gifts from savings. The main difficulty is that this assessment could mean that the individual will not be able to afford the contribution assessed as payable.

In terms of meeting any such shortfall, s 21 of the Health and Social Services and Social Security Adjudications Act 1983 states that where an individual deliberately deprives themselves of an asset, the local authority can only recover any sums that the individual subsequently has to pay towards care costs from the person to whom the asset was transferred if the deliberate deprivation occurred within six months of the individual approaching the local authority for care funding.

However case law has shown that if a transfer is made more than six months before the approach for funding, the local authority can still treat the individual as having deliberately deprived themselves of the capital. If the local authority does provide funding it may treat the assistance as a debt owed by the resident. The local authority could use insolvency legislation to pursue this debt and seek a court order to set aside the asset transfer if it was carried out with the intention of defrauding existing or future creditors. To date, there have been few examples of local authorities making use of this legislation, but this may change in the future.

The concept of notional capital cannot be ignored.

Planning opportunities

The following are potential opportunities, no more than that. Whilst local authorities have an overriding obligation to provide care, they also have substantial discretion in how they address each case. This was specifically highlighted by Lord Sutherland. Clients must be made aware of this when planning is discussed, and must implement any arrangements in the knowledge that the individual local authority may be able to defeat or challenge the measures effected. Success cannot be guaranteed.

The main way of planning for care costs is to gift assets, either outright or into some form of trust, but always bearing in mind the issue of notional capital considered above. Particularly in relation to clients’ homes, gifting will raise capital gains tax issues stemming from the loss of principal private residence relief, but there is also the potential of the recipient becoming bankrupt or being party to a divorce, both of which put the property at risk. Clients must also be aware of the rules on gifts with reservation of benefit and the pre-owned asset tax if the property is not transferred for full consideration. Whilst the trust structure may protect against the issues of divorce or bankruptcy (provided neither is imminent), other issues may not be addressed. In particular, if a transfer into a trust is considered, the potential for an upfront inheritance tax charge must be taken into account.

The inclusion of a discretionary nil rate band trust in the wills of both spouses/civil partners may also prevent some assets being assessed as those of the survivor.

There are also investment opportunities. For some time now there has been discussion as to whether the definition of life assurance for the purpose of the local authority means test includes an investment bond, and some local authorities have sometimes sought to take investment bonds into account as assessable assets.

Paragraph 6.002B of the most recent version of the Charging for Residential Accommodation Guidance (CRAG), issued by the Scottish Government to all local authorities and effective from 7 April 2008, makes it clear that if the 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”, such practice is not acceptable. However, the surrender value of an investment bond without life assurance will be taken into account. As with other planning measures, this will be subject to any determination that the conversion of funds into this particular investment was a deliberate attempt by the individual to avoid contributing to care costs.

What will be vitally important in any planning exercise is motive. Case law has established that the local authority will consider the nature of the disposal in the circumstances and context within which it was made. Therefore, wherever possible, evidence of a good reason for the disposal, such as inheritance tax or investment planning, other than to protect against nursing care costs, should be documented.

If one party to a marriage or civil partnership is assessed as requiring to move into a care home, the value of the couple’s jointly owned property will be disregarded if the property will continue to be occupied by the other spouse/civil partner. If the party remaining in the property needs to move to another more suitable property, the replacement property, if bought within six months of the other party moving into the care home and bought in the joint names of the spouses/civil partners, will continue to be disregarded. Otherwise, the share of the sale proceeds attributable to the party in the care home will be assessed.

Finally, long-term care cover offers a way of insuring against future care costs. However, it is only offered by a limited number of providers and can be very expensive as a result.

Another summit

Lord Sutherland said of planning for and funding personal care: “It is rather like climbing a Scottish mountain. Having reached the vista provided by one horizon we realise that a much larger vista lies before us for which we must prepare.”

Clients reaching retirement and looking ahead to the potential need for care in the future must feel much the same. 

Deferred payment: the government expects

If the transfer of the client’s property, whether outright or into a trust, is ultimately discounted as an option, the client should be made aware of the facility to defer payment of care costs. Deferred payment agreements (DPAs) were introduced by the 2002 Act and in March 2008, the Scottish Government issued a reminder of its expectation that all local authorities will operate deferred payment schemes. DPAs enable the local authority to offer to pay part of the resident’s assessed contribution to the care home fees and recover those sums from the resident’s estate after death. Importantly, interest is not charged on the deferred payments until 56 days after death, so whilst alive, the home owner, and his/her family, can continue to benefit from the appreciation in the capital value of the property and the arrangement is likely to be cheaper than equity release.