Care Fees Planning Through Reversionary Leases

Philip Laidlow continues his series of articles by looking at the scope and effectiveness of Reversionary Leases as a means of planning for care fees.

If there is no alternative to inheritance tax planning through the family home, then in the current climate - lease carve-outs being out of the question because of Ingram - one possibility is the use of a reversionary lease. They do not seem to be much used, possibly because the CTO are said to consider that there may be a reservation of benefit. This article looks at whether the reversionary lease scheme might lend itself to care fees planning. The GROB point even if thought valid (which I do not) in many cases is not going to be an issue.

Reversionary Lease

In concept the lease is simple. The homeowner grants a lease for X years to commence either in Y years time or on the day following his death (or the death of the last spouse to die where a couple is involved). The idea is to leave the homeowner with a fag-end freehold reversion. Y years would be selected comfortably to see him out. Usually it would not be an issue, but for the avoidance of doubt if there is no rent then Y can be in excess of 21 years. X would be a very lengthy term. The idea would be to push the bulk of the value of the home into the long lease, or at least to leave the freehold reversion with a much reduced, and reducing, value. In reality there may well be a suspension of a portion of the value of the home. For various reasons flowing from leasehold enfranchisement, and having knock-on effects for security and inheritance tax, X is likely to be 299 years.

Security

The fag-end freehold reversion should give security of occupation for the homeowner as long as is desired. If a lease is simply given to the children it may be the theoretical risks of bankruptcy, matrimonial exposure etc possibly may have consequent risks for the homeowner's security. If in any doubt then a belt and braces approach to suspend those risks until after the homeowner's death can be taken by giving the lease to trustees rather than the children outright. There is no need to put the freehold interest in trust. It should be retained beneficially. There will be a need to deal with it through the will so that it does merge after death with the lease. This can be a straight gift to the leaseholder through the will, though if inheritance tax is an issue a more sophisticated route will have to be found, perhaps through a discretionary trust in the will.

The conveyancing ramifications of the exercise should be borne in mind. The homeowner is not going to be able to sell and move home. The exercise should only be considered if the property in question were definitely the last home. Equally, a sale of the home between entry into care and death might be difficult; though this would be a two-edged thing.

Deprivation

As in all planning in this context the ideal would be to grant the reversionary lease well in advance or at a time when the homeowner's (or better even homeowners') situation precluded the subsequent application of the deprivation provisions. If that is not the case, and the deprivation provisions have to be considered there is nevertheless a strong argument against the grant of a reversionary lease, even at nil rent, not amounting to deprivation. This would be based on the concept of deprivation and the virtual lack of a definition of capital. There is only the circular definition. A homeowner who grants a reversionary lease still has the same asset. "Deprivation" suggests that an asset is disposed of by the homeowner; that he no longer has something he had. The freehold may be subject to the long leasehold but that amounts to the creation of a capital asset which was not there previously, and the concomitant suppression of value of the capital asset retained. The definition of capital is so lacking, but there must be a decent argument that it does not mean a person's overall capital value or wealth. That said, the point has been taken by one or two local authorities that certain value suppression techniques in themselves amount to deprivation. Typically a gift with one value out of the hands of the parent and an (ostensibly) lower value into the hands of the child. However, there is the distinction that in the relevant cases there is always some form of disposal on which to hang the subjective element.

Even if deprivation could be shown there are arguments over what the effect of the notional add-back are. The homeowner will be treated as if he had the reversionary lease. That would otherwise be a disregard as a reversionary interest. Notional capital can be a disregard just as much as actual capital. If the reversionary lease were notionally added back possibly one then has to presume a notional re-merging with the freehold. There is certainly an argument that one does not go the further step.

Overall, while one cannot exclude reversionary leases from deprivation nor will they obviously fall foul of the deprivation provisions. One should not overlook that the grant of a reversionary lease would otherwise in terms of the motive test scream out deprivation, which brings us back to the original point that ideally it is something to be used earlier rather than later.

Recovery from Donee

With reversionary leases there is no prospect of the local authority recovering from the donee, unpaid charges unrecovered from their resident. Section 21 of HASASSAA can only come into play where there has been a transfer. Here there patently has not; there has been creation only.

Insolvency Remedies

These need to be founded on deprivation with motive hence if a local authority is unable to successfully use the deprivation provisions it will struggle equally under the insolvency provisions.

Conclusion

Reversionary leases are far from an ideal technique, but then nothing is. In most situations they will offer nothing that a trust would not, but in a limited number of situations offer advantages over a trust. Where they might have some relevance is in a more sophisticated version where the client is determined to plan against both inheritance tax and care fees. It is hard to conceive of any other technique which can apply to the home for both inheritance tax and care fees planning. Trusts and gift and leaseback are both techniques which fall foul of reservation of benefit.

Philip Laidlow, Associate Solicitor, Eversheds Nottingham