Deprivation of assets under watch

From April 2027, changes to inheritance tax on pensions are prompting many to review their estate plans, but these decisions could have unexpected implications for long-term care costs.

People are updating their tax-planning strategies to take account of inheritance tax (IHT) being charged on unused pension pots from April 2027. An unintended consequence of such planning, however, is the impact on long-term care costs.

The problem

If capital and savings are above £23,250, then in England a person has to fund all of their long-term residential care. This might seem a low threshold, but remember the value of your home will be disregarded if your partner (or a relative aged 60 or over, or a dependent child) continues to live there. Therefore:

• Deprivation of assets rules mean that a person cannot obtain care cost funding by gifting assets to their family.
• This is where the new pension tax rules can be an issue: many older people are attempting to reduce future IHT bills by withdrawing large sums from their pensions, and then gifting the money to children and grandchildren.
• A local authority might well treat such gifts as a deliberate deprivation of assets.

There is no time limit on how far back local authorities can look. If a person is found to have deprived themselves of assets, they will be treated as still owning the money or assets that were given away.

Given longer life expectancy, the financial impact of unexpectedly having to fund care costs can be substantial.

The right balance

A substantial gift may well meet the IHT objective, but could create future difficulties when care costs come into play.

Local authorities will look at whether care needs were foreseeable at the time a gift was made, so earlier gifts when made in good health will be much easier to justify. Detailed record keeping is essential. The records should show that the purpose of a gift is genuine estate planning or family support, as opposed to avoiding care costs.

Age UK’s detailed factsheet on deprivation of assets can be found here.

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