We explain the rules and legal implications of gifting money and other assets, including the deliberate deprivation of assets.
Legal transfer of property
There are a number of reasons why you might think about giving away your property or some of your assets as you get older – for example, to your children, another relative or a friend.
Two typical aims are:
- to avoid inheritance tax;
- to reduce the value of your assets and help you qualify for local authority care funding in later life.
It’s important to be aware of the strict guidelines on giving away property and assets. Any assets that you give away as gifts during your lifetime may be examined during a financial assessment for care.
If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and there may be inheritance tax due on some or all of its value.
Gifting your home or other assets to avoid care fees
Arranging care in later life is expensive. Anyone who has assets above a certain level – including, in some cases, the value of their home – will usually have to pay for some or all of this care themselves.
For many people, their home is likely to be their most valuable asset. So it’s not unheard of for people to consider ‘gifting’ their property or other assets to a family member or friend to increase their chances of getting state-funded care in later life. For example, you might think that by transferring ownership of your home to your children, the value of your assets would be reduced, giving you a better chance of qualifying for local authority-funded care.
However, there are complex rules to be aware of, and local authorities may take the value of your property into account even if you have transferred it to someone else. It is advisable to seek legal advice before transferring ownership of a property to someone else.
If you apply for local authority funding, the council will carry out a financial assessment to determine how much you should pay towards the cost of your care. If the authority believes you intentionally disposed of a property in order to avoid paying for social care, it will regard this as a ‘deliberate deprivation of assets’.
In that case, the value of the property would be taken into account when the council assesses your ability to pay for care. So, you could end up having to pay for your care, despite no longer having a house to fund those costs.
It is not only property that is covered by strict rules when it comes to giving gifts to family or friends. If you give away large sums of money or valuable possessions, these could also be counted as part of your assets if you seek local authority support with the cost of care,
Giving away your property or other assets could also affect the liability of your estate for IHT after you die. Read more detailed advice on inheritance tax and giving gifts.
What is deliberate deprivation of assets?
When a local authority carries out a financial assessment for care it will ask about previously-owned assets, not just those that are owned currently. Deliberate deprivation of assets is when a local authority deems that a person has deliberately disposed of assets to increase their eligibility for social care funding.
This might include giving away (gifting) assets, as well as other courses of action, such as selling an asset for less than its true value. For example, there have been cases of people ‘selling’ their house to a relative for a nominal fee such as £10, just so they can transfer the legal ownership of the property. If avoiding care costs is considered to be a significant reason for the disposal, then it may be considered a deliberate deprivation of assets.
Here are some examples that could be considered as deliberate deprivation. There can be implications both for the person giving away the assets and the person receiving them.
- gifting money or expensive items, such as a piece of jewellery that has recently been purchased, to family members or friends
- gifting property by transferring it into someone else’s name
- selling an asset, such as a property, to someone for less than its true worth
- putting money into a trust or tying it up in some other way.
When deciding if deprivation was ‘deliberate’ the local authority will look at the following aspects:
- Motive: when disposing of assets, was the main reason to avoid care charges?
- Timing: there is no set time limit, although local authorities are unlikely to investigate too far back. Most importantly, they will look at the time between the person realising that they needed care and the disposing of assets.
- Amount: was the gift a significant amount that would make a difference to your capital limit? The asset would have to be worth a significant amount for the local authority to pursue this action. Giving away a £300,000 property, for example, would significantly affect your total capital whereas smaller gifts – such as giving someone a £300 ring – are unlikely to prompt further investigation.
It all boils down to intention. When you made the gift, could you have reasonably known that you might need care? For example, if you fell ill, were assessed as needing residential care, then signed your property over to a relative the following week, that would look suspiciously like deliberate deprivation.
Are all gifts a deliberate deprivation of assets?
No, not all disposals of assets are necessarily deliberate deprivation. It might have nothing to do with care, especially if there was no consideration of paying for the cost of care at that time.
- You might want to give tax-free sums of money to children or grandchildren, so that you can enjoy seeing them spend it and to avoid inheritance tax.
- You might also want to help family members who are struggling financially or splash out on a well-deserved ‘holiday of a lifetime’.
- If you went on an extravagant cruise while you were still in good health and had no idea that you would need care, this might simply be regarded a post-retirement treat.
Giving away capital can therefore have serious consequences. If a person is found to have ‘deliberately deprived’ themselves of assets, the value of these assets can still be taken into account in the financial assessment, even though they no longer own them.
The value of the assets that they used to have is called ‘notional capital’. The value of a person’s notional capital can be added to their remaining assets to form their total financial assets for the financial assessment. So, in the example of transferring ownership of your home, not only could you end up having to pay for your care, you might no longer have a house to fund those costs.
Transferring assets into a lifetime trust
You can use a lifetime trust to transfer ownership of assets, such as money or property, while you are still alive rather than giving them directly to a person. Assets placed in a lifetime trust are managed by one or more trustees, and if you live for more than seven years after creating the trust, assets would not form part of your estate.
It is sometimes suggested that transferring your property into a lifetime trust could help you to avoid care fees. However, it is generally not advisable to use a lifetime trust for this purpose. If you are assessed for local authority care funding, there is a significant risk that any assets you have moved into a lifetime trust could be seen as a deliberate deprivation of assets.
Lifetime trusts can be an effective way to pass on assets to a minor or someone who needs the help of trustees to manage their finances. With the correct financial advice, they can also be an effective way to manage the inheritance tax burden on your estate.
Read more about inheritance tax and trusts.
Powers of recovery and your right to appeal
If the local authority funds someone’s residential care costs and later rules that a person has ‘deliberately deprived’ themselves of assets, they have the power to claim care costs from the person that the assets were transferred to.
Legally, local authorities have the power to recover costs by instituting court proceedings. However, a local authority should only do this after it has tried other reasonable alternatives to recover the debt.
The council’s decision must be reasonable and there is a right of appeal if you feel that an unfair decision has been made. If you want to make a complaint or appeal a decision, you should contact your local authority.
Find out how to challenge a local authority decision.
Potential risks of gifting money or assets
- It’s permanent: there’s no going back. Once you have given a gift to someone, you can’t change your mind.
- Loss of financial security: assets might be needed for other unforeseen costs in the future. You might want to move house or pay for care in your home, for example. If you have disposed of assets, you might not have money when you need it for other things.
- Loss of choice and control: reducing assets will leave you financially vulnerable and limit the choices you have in the future.
- Situations/relationships can change: someone that you trust to ‘hold on to’ a valuable asset, or own your property ‘in name only’ and pass money to you at a later date, might not always live up to their end of the bargain.
- Divorce/bankruptcy: you might give your house to someone on the understanding that you can stay living there. If the person receiving the gift gets divorced or goes bankrupt, however, the house may have to be sold to form part of a divorce or bankruptcy settlement. This could leave you homeless.
- Capital Gains Tax: if you, or the person that you give the gift to, makes a profit from that asset you may be liable for Capital Gains Tax. This is often the case with second homes. Read our guide to Capital Gains Tax for more information.
Seek legal advice
If you’re considering gifting any assets, particularly transfer of a property, you’ll need to seek legal advice to make sure it’s done properly. The Law Society has produced detailed guidelines for solicitors on gifts of property and their implications for long-term care. Make sure that any solicitor you speak to is aware of these guidelines.
Which? Legal can provide legal advice on handing over property to family or friends.
Paying for care: a free guide from Which?
Our free guide to Paying for care in later life has more straightforward advice on how to pay for care. The guide covers the main care options, how much they typically cost and how to find out if you are eligible for financial support. And if you have to pay for some or all of your own care, the guide has lots of tips on how to juggle your finances to cover the costs.
Download our free guide for more tips on paying for care.