Regular

posted 16 Sep 2002 in Volume 7 Issue 5

Preserving assets by using the deferred payment scheme

In certain situations it may be possible to mitigate the loss to a resident’s estate by utilising the availability of the deferred payment scheme. With property prices still rising on a national basis, low interest returns and a volatile stock market, Caroline Bielanska, solicitor, TEP and freelance consultant, assesses how it may be preferable to retain the resident’s home rather than selling and liquidating the proceeds.

History behind the scheme

The government announced back in July 2000 their plan to give greater help to people who did not want to sell their home in their lifetime to pay for care by making loans more widely available¹. It has been possible since 1983 for a local authority to take a charge on land under section 22 of the Health and Social Services and Social Security Adjudications Act 1983 (‘The 1983 Act’). The 1983 Act applies where a resident is in receipt of National Assistance Act 1948 Part III accommodation provided by a local authority. The accommodation is usually either a council home, voluntarily run home or an independent home. The crucial point is that the contract placement is between the local authority and the care home. The local authority will have undertaken a financial assessment of the resident and in the event that he fails to pay the assessed sum where he has a beneficial interest in land in England or Wales, the local authority have a discretion to create a charge in their favour on that land. The 1983 Act charge applies where a debt is being actively pursued by the local authority and as such, sets itself apart from the new deferred payment scheme. The resident will not have to pay any interest until after his death², at which point interest becomes payable by his personal representatives.

Due to budgetary problems many local authorities were reluctant to put a charge on a resident’s property and sit it out until the property was sold. If money was not coming in from accommodation fees, it caused a cash flow problem when money had to be paid out to the care home proprietor.

Section 55 of the Health and Social Care Act 2001 introduced a power for the local authority to take a charge on land instead of contributions towards the cost of care fees. This was brought into force from 1 October 2001 by the National Assistance (Residential Accommodation) (Relevant Contributions) (England) Regulations 2001³.

When does a deferred payment apply?

The scheme covers people availing themselves of Part III accommodation or (unlike the 1983 provisions) proposing to do so and they would be liable to pay the full standard rate or any lower amount, then the local authority may enter into a Deferred Payment Agreement (‘DPA’) with the resident.

What is a deferred payment agreement?

Subsection 3 of the 2001 Act defines a DPA as an agreement whereby:

During the ‘exempt period’, the resident is not required to make any payment to the authority of the assessed contributions;
The total amount of the contributions outstanding become payable on the day after the date on which the exempt period ends;
The resident grants the authority a charge in their favour in respect of any land in which he has a beneficial interest, as security for the contributions payable.

The ‘exempt period’ starts from the date the DPA is to take effect and not from the date it is signed as of course, it possible for the agreement to be signed before admission into a care home. The period ends either 56 days after the resident’s death or any earlier agreed date. Of course, if the property is sold before these dates the debt becomes immediately payable.

It is only after the exempt period ends that any interest becomes payable at an unspecified rate but one which must be determined by the local authority.

The Regulations provide that not only must the person entering or in permanent care have a beneficial interest in the property but also it must have been his main or only residence, thereby limiting the scheme to people with a home and insufficient income and other assets to meet the cost of care⁴.

It is the supporting Department of Health Guidance⁵ that sets out in detail how the scheme is to operate. There is additional eligibility criteria, namely the person must establish that:

For whatever reason he does not wish to sell his home;
Is unable to sell his home quickly enough to pay his care fees.

It is therefore possible for the resident to choose to keep the house, possibly rent it out to get a better return on his asset, than sell it. The local authority have a discretion whether to agree to a DPA and are unlikely to agree where the resident already has an outstanding mortgage on the property unless of course such mortgage can still be paid; a remote possibility.

More significantly if the size of the weekly deferred contribution is high, it may restrict the local authority’s ability to enter into other DPAs. Central government has given each local authority an amount to finance the scheme. The aim is that it will generally self finance as money paid out on care fees will be fully recovered by the local authority when the property is eventually sold.

The DPA should not be applied where there is already mandatory property disregards, for example, the resident’s stay is temporary as they intend to move back home or it is within the first 12 week disregard period of a permanent stay. Additionally, the DPA should not be used in place of other discretionary property disregards such as the continued occupation of a former carer in the resident’s own home.

At what point are DPAs available?

The DPA should only be offered when a financial assessment has taken place and the resident is aware of the deficit in care fees, between income and the cost of care (excluding the main or only home). This will of course mean that the resident has already had their needs assessed and the local authority have concluded that they have a duty to make arrangements for the person’s care in accordance with section 21 of the National Assistance Act 1948. A resident who has already had a charge put on their property under the 1983 Act can choose to have the charge transferred to a DPA⁶. The advantage is that they have a greater period of time before interest becomes payable and as the debt will not be actively pursued there will be less legal costs as there will be less correspondence.

Although the guidance note states that a DPA should not be used to enable a person to retain more of their income or capital than would normally be allowed in a normal charging for residential accommodation guide assessment (CRAG)⁷, it does not prevent a resident from using the scheme to maximise what he already has, and possibly reducing the deficit by increasing income from receivable rent.

Once the property is sold, the local authority are repaid the funds that they have paid out to the care home on the resident’s behalf. As the resident would not be in receipt of care where the cost of the accommodation is or may be borne wholly or partly

out of public or local funds, attendance allowance remains payable⁸. The resident’s only expense is to pay any legal expenses and disbursements for the creation of the charge, which includes the local authorities legal fees as well as their own advisers’ costs.

As most local authorities negotiate a relatively low contract rate with care homes, there is a saving to be made on care fees by accessing local authority arranged care. A self-funding resident in a care home often pays more for the cost of their care than a Part III resident. This is because as bulk purchasers, local authorities often negotiate discounted care fees for their residents. Proprietors often explain this as a type of cross subsidy. Self-funders pay a higher fee to the home than the local authority, the excess being used to meet the short fall of having to discount the care fees for the council. This situation will only change when care fees are more transparent.

Obtaining the ‘room with a view’

Under the National Assistance Act (Choice of Accommodation) Direction1992, the proposed Part III resident has the right to choose their accommodation subject to the following:

A place is available;
The accommodation is suitable to meet the needs assessed;
It does not cost the local authority more than usual for accommodation for someone with those needs;
The home agrees to comply with the terms and conditions set by the local authority.

As a general principle, if the proposed resident wishes to choose a more expensive home than the local authority will finance the resident cannot use his own limited resources⁹ and would need to rely on a third party to pay the difference. However, as a result of Section 54 of The Health and Social Care Act 2001 Regulations have been made¹⁰ that allow a resident to make a top up out of their own resources for the cost of their care where the resident has (among others) accessed the deferred payment agreement scheme.

The purpose of the change was to ensure that residents who, but for the house being sold would be self–funding, have the choice of their preferred accommodation. Resident’s who have a deferred payments agreement may top up from:

Earnings disregarded by CRAG;
Income disregarded by CRAG;
Capital disregarded by CRAG.

Other capital resources, including the value of their home, which is subject to the deferred payment agreement, with the proviso that the resident must be left with the total capital resources under the means test to the value of the lower capital limit. When the value of the property is used as ‘collateral’ for top-ups. The value of the top up is to be added to the sum accruing under the deferred payment agreement.

House prices continue to rise

According to the latest survey from the Nationwide Building Society¹¹, British house prices rose in May at their highest annual rate in 13 years. Overall, house prices rose by 2.1 per cent during May, taking the annual growth rate to 17.9 per cent, which is the highest since the housing boom of the late 1980s. A property worth £100,000 five years ago would now be worth on average £145,270 – a return of over 45 per cent. Compare this to a return of 23.9 per cent on a saving account or 17.4 per cent in the UK stock market¹² over the same period, it becomes clear that the resident will have a better return on the capital retained than if they sold the home and invested the proceeds. With interest rates low and stock market investment unstable it is a less risky option for such a client.

But what if the housing bubble bursts?

Philip Shaw, chief economist at Investec Bank is reported as saying: “Although the likelihood of a collapse as happened a decade ago seems low, the longer the prices rise sharply like this, the greater the risk of a sharp correction”¹³. Many experts believe that house-price inflation will be controlled by a rise in the Bank of England interest rate. Rates are unlikely to increase dramatically, which would undermine consumer confidence and could have a knock on effect on business and in turn in employment.

Alex Bannister, Nationwide’s group economist, said the boom showed few signs of running out of steam¹⁴.

The truth is no one can accurately predict what is to happen. With house building at an all time low, more people living in single households there is plenty of evidence that the demand for property is unlikely to stop abruptly. However, a word of caution: in the event that the housing market does collapse, there may be a loss to the resident and so it will be for the client to ultimately determine how they think the property market will go. The DPA is rarely advisable if the property is likely to go down in value.

Create an income by renting

The buy–to-let properties flooding on to the lettings market have pushed rents down for the first time in over two years according to a recent survey undertaken by the Royal Institute of Chartered Surveyors¹⁵. However, there is huge regional variation on rent. Markets in the north, midlands and Wales continue to see rents rising. London and the south region, on the other hand, have seen rents fall sharply for the third quarter in a row as the market tried to accommodate a flood of property.

The older client will not usually have a mortgage to pay, and so after payment of any income tax, management fees, maintenance, increased insurance premiums they are still likely to be in profit. Returns are better where the property is smaller, in good order and easier to let rather than a large expensive property and more so where the property is close to transport links or schools. In Manchester, a city centre two-bedroom furnished flat worth £90,000 can produce a rent of £800 per month. In comparison, in Hertford, with good links to London a similar property would be worth £145,000 and produce a rent of £750 per month.

Whether the resident is likely to find a tenant depends largely on the location of the property. It should however be noted that in areas where there is a surplus of properties there are reports that tenants are seeking rent–free periods or reduced rents on both new lettings and lease renewals¹⁶.

Any rent received after payment of income deductible expenses can be used to off set care fees, further reducing the liability outstanding on the charge taken out by the local authority.

Case Study:

Mrs Smith, a widow aged 82 years of age owns her home a 3- bedroom semi detached property worth £110,00017. She also has £10,000 of savings. She has been diagnosed with dementia and is to be admitted to a residential care home. The property can be rented for £600 per month.

Weekly fees for the care home £280.00¹⁸

Less income:

State pension £75.50

Attendance Allowance £37.65¹⁹

Late husband’s pension (net) £25.00

Rent £96.92²⁰

Personal allowance £16.80

Balance to which deferred payment applies £28.13

£28.13 x 52 weeks = £1462.76

Property price would have to increase only by 1.3 per cent for Mrs Smith to be better off keeping the property as the amount of deficit is compensated by the growth in value in the property.

The need to consider this as an option

Practitioners will need to consider whether to make use of the deferred payment scheme, when advising a client who is moving into a care home. There is a need for good local knowledge of the housing and rental market and having this is the key to advising on this point. The resident client needs to be encouraged to take their solicitor’s early advice as many may well believe that they have to sell the property and cannot rent it out. As the case study shown in the table highlights it may be a way to preserve or at least mitigate the loss to the estate, at least while property prices keep on rising.

Reference
1. 2.14 NHS Plan July 2000
2. S.55(6)(a) Health and Social Care Act 2001
3. LAC (2001) 25
4. Rule 2 of the 2001 Regs.
5. Lac (2001) 25
6. LAC (2001) 25 point 16
7. LAC (2001) 25 Point 13
8. Reg. 7(1) Social Security (Attendance Allowance) Regulations 1991.
9. LAC (2002) 11 Par 8.018
10. The Health and Social Care Act 2001 (Commencement No.2) (England) Order 2001 2001/3167
11. Report of 29 May 2002
12. Guardian Newspaper Money Section 10.5.02
13. BBC report of 30 May 2002
14. Nationwide report 29 May 2002
15. Survey of the UK lettings Market RICS 30.5.02
16. Richard Donnell, Head of research at FPD Savills. The Guardian 11.3.02
17. Based on HM land Registry average price index for the period Jan- March 2002
18. Based on average care cost. Research by Laing and Buisson
19. Assuming on the lower rate of AA. Higher rate is £56.25
20. Assume a deduction of 30 per cent of rent for payment of income tax and other outgoings on property.

Caroline Bielanska is a solicitor, TEP and freelance consultant. She can be contacted at caroline.bielanska@ntlworld.com.