Many people are concerned about long-term care costs and how best to manage inherited assets to meet these costs in the future. Estate planning options like Deeds of Variation offer some inheritance tax (IHT) benefits, but there may be a risk that these arrangements are seen as an attempt to avoid paying for care, if that became necessary in the future.
Understanding how these two areas interact and what factors to consider when passing on inherited wealth can help you prepare for the future.
What is a Deed of Variation?
A Deed of Variation is a document that allows the beneficiary of a deceased person’s estate to redirect their inheritance to someone else, such as a child or grandchild.
For IHT purposes, the document must be signed within two years of the death for the variation to be treated as if it was contained within the deceased’s Will. This prevents the beneficiary’s IHT position being affected, as would be the case if the beneficiary simply gave their inheritance away.
How can asset transfers affect care costs?
Rules exist to prevent individuals from transferring wealth with the clear intention of reducing their contribution to care costs in the future. Therefore, it is important to understand the reasons behind a Deed of Variation and to clearly define the circumstances for making one at the time of application.
The primary responsibility for adult social care lies with local authorities or in collaboration with the NHS via local Health and Social Care Partnerships. Where a need for care is identified, the authority will conduct a financial assessment to determine the amount a person needs to pay, if anything. A person’s contribution will depend on the level of their income and their “capital” assets such as property, land, savings and investments. Generally, the more assets a person has, the more they will have to contribute.
During this process, the authority may ask if a person has recently given away assets (although there is no time limit beyond which they cannot ask questions) and if so, the reasons for the transfer.
In general terms, if gifts are made within 6 months of a person requiring care, the authority has the right to send the bills to the person who received the asset. If a gift is made further back in time than this there is no such right. However, in some cases such gifts can still be treated as being owned by the gifter for care cost purposes, and their contribution calculated accordingly.
What should I consider when making a Deed of Variation?
There are several things to consider when putting in place a Deed of Variation.
The first is the timing. Deeds of Variation must be signed within two years of the deceased’s death for it to be effective for IHT purposes.
The second is intention. If there are good reasons for making the variation beyond care cost concerns, such as IHT mitigation, these should be documented at the time the deed is made and not retrospectively.
Thirdly, remember your own needs. Take stock of your life circumstances, general health and financial security. A person in their 80s is perhaps more likely to require residential care than a person in their 30s, and the closer the period between the gift and the need for care (or the realistic prospect of care) the greater the danger of falling into the deliberate deprivation rules.
People should not lose sight of their own needs and speaking to a financial advisor may also help in identifying options.
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