Care Fees

Philip Laidlow continues his series of articles examining various aspects of this current `hot potato'

This article records one or two recent developments and then goes on to look at where insurance sits in the financial contribution regime.

Re: Palfrey

Amending regulations to counteract that part of the judgment Re: Palfrey which confirmed that a landlord's interest in a tenanted property is a reversion, have been introduced, as recorded in an Editorial note to the last issue. Such an interest is, therefore, no longer a disregard. While tenanting the property will therefore no longer be a complete means of sheltering the value of the house on entry into care, it may still provide a partial answer if there is no other solution. It is hard see that the actual granting of a tenancy is deprivation as such. The asset - the freehold - has not been disposed of; there has simply been a carving out of a different interest from it. Even should the deprivation provision be potentially applicable, if one purpose of the tenancy is to generate some income to meet fees then that should go someway to countering the purposive application of the deprivation test. That leaves the way open to some form of tenancy arrangement which reduces the market value of the home during care yet protects its full availability in the future after death.

Amending regulations to counteract the valuation aspect of Re: Palfrey are now thought to be in the pipeline. Their timetable is not known. The regulations will presumably counteract the outcome of Re: Palfrey in the context of the National Assistance (Assessment of Resources) Regulations. It is almost inconceivable that they can or will have any impact on Section 21 HASSASSAA 1983, that being primary legislation. It should continue to be a good argument therefore that the value of a half share of a property in the hands of a donee, for the purposes of recovery from the donee, is small.

Asset Limit

The new asset limits of £16,000 above which there is no LA contribution, and £10,000 below which there is almost full LA contribution, are now in operation. These new limits will presumably have two or three different effects. First, they may present achievable targets for a number of people who did not see £3,000/£8,000 as achievable. An increase in planning efforts may be expected. Secondly, they are likely to increase the funding burden on LA's. Presumably the increased financial pressures on LA's will be reflected in a more vigorous effort, in discharge of the fiduciary obligation to council tax payers as a body, to recover contributions from residents. Thirdly, and as a corollary of the two points above, residual capital assets of £10,000 is likely to be a much greater incentive to LA's than was residual assets of £3,000. A successful LA challenge under the deprivation test previously may have been a pyrrhic victory. If the resident had no assets with which to satisfy the resulting judgment, it often got the LA nowhere, particularly as there would still be a continuing obligation to provide care. Residual capital of £10,000 will satisfy a judgment debt for a number of months' charges. Although the burden of proof to show deprivation is with the LA, it is to the civil standard (i.e. on the balance of probabilities) and in a number of situations is likely to be quite easily shifted on a prima facie basis. Given that there is no independent tribunal (compare the adjudication officer for income support) LA's do have the scope to be vigorous.

Insurance

The disregards set out in Schedule 4 to the regulations contain one or two entries focused on life assurance. The surrender value of any life assurance policy is a specific regard in assessing capital resources, as is the surrender value of any annuity, or the capital value of a right to receive an income under an annuity.

This immediately throws up the question of the interaction of disregards and the deprivation provisions. Can one switch capital into insurance products and lock-in to the benefit of disregarded status? The question is in fact a wider one as there are a number of other relevant disregards. If one disposes of a reversionary trust interest, for example, which falls in post disposal but pre-assessment, can deprivation potentially apply to add its value back as a notional resource? Probably yes.

One has to go back and look at the two relevant regulations:

21 - (1) The capital of a resident to be taken into account shall, subject to paragraph (2), be the whole of his capital calculated in accordance with this Part and any income treated as capital under regulation 22.

(2) There shall be disregarded from the calculation of a resident's capital under paragraph (l) any capital, where applicable, specified in schedule 4.

(Schedule 4 is the schedule setting out the capital disregards)

24 - (1) A resident may be treated as possessing actual capital of which he has deprived himself for the purpose of decreasing the amount that he may be liable to pay for his accommodation ....

The first regulation is a little circular. Capital is all capital but disregarded capital is not brought into the calculation i.e. disregarded capital does not seem to be excluded from the definition of capital, but excluded, rather, from the computation. The starting point is that disregarded capital is nevertheless capital. There is no limitation to "capital" as used in regulation 25. Potentially any capital disposed of with the necessary intent can be added back on a notional basis, and since capital, as above, seems to include disregarded capital, then the latter can be added back as much as capital which will come into the financial assessment.

It is possible to argue the contrary. Schedule 4 paragraph 8 is the disregard of "any personal possessions". Interestingly paragraph 8 itself then goes on to except from the disregard those personal possessions acquired with "the intention of reducing his capital in order to satisfy a local authority that he was unable to pay for his accommodation at the standard rate or to reduce the rate at which he would otherwise be liable to pay for his accommodation", i.e. there is an almost self-contained deprivation provision within the disregard itself, although the wording is not the same as the regulation 25 disregard. One has to wonder given the width of regulation 25 why a specific deprivation provision should be required unless regulation 25 does not extend to disregard it. Nevertheless, on balance it is probably correct to assume that disregarded capital is equally subject to the regulation 25 deprivation provisions.

Someone who might need to go into care in the short term and who puts his cash or liquid assets into life policies might still be subject to the capital deprivation rules. However deprivation involving a change in the nature of the assets in the estate, rather than a disposal out of the estate to third parties, will be more difficult to show and presumably life assurance is a less inflammatory route to go than others.

Those who hold their investments through life assurance vehicles for tax or other reasons may find that in protecting their estates against exposure to care fees they have an added bonus. Those reaching later life, but where care is not imminent, may start to factor into their situations that investments held behind a life assurance product may potentially offer benefits.

One of the principal drawbacks, to such switching, is that any disposal to create liquidity to go into life assurance will potentially incur a CGT charge. Given that most care situations only arise after the first death, and that there is a CGT uplift on the first death, then that might be considered a prime time to consider such a switch.

The belt and braces approach to the sheltering of wealth behind life assurance products can be taken if the bond or other product is additionally held in a trust. This does seem to be

happening in practice, through discretionary trusts. Whether this does actually achieve anything, or whether each disposal/payment (one into insurance, and the other into trust) simply compound one another in the context of deprivation, it is hard to judge. In all situations, even where early life assurance is gone into on a non-aggressive basis well before the likelihood of entry into care, one has to be careful that the life assurance product really is a policy of life assurance. Certain "bond" products, contain no true life assurance content, but merely have the clothing of a life assurance policy and turn, in a loose sense, around the event of death. Or at least this was sometimes the case until recently. See generally Fuji Finance -v- Aetna Life Insurance [1994] IV All ER 1025. Possibly LAs would not be alive to this point, but in any event life offices seem increasingly to offer enhanced life cover in particular circumstances (albeit only at 101%) which ought to be sufficient to cure the point.

Long Term Care Insurance

Those looking at the matter well ahead may feel that the real solution is pure insurance to cover the cost of care. Products are starting to become available but until the Government' s recently announced proposals have been consulted on and take more shape, so the exact commitment and requirement is known, and the insurance market settles down around that, people possibly could be better advised awaiting the outcome. That will certainly match the natural disinclination of people to go this route.

Annuities

The value of the right to receive any income under an annuity (for which a market does exist) and the surrender value (if any) of an annuity are disregarded capital items, but the income from an annuity though does seem to come into the reckoning for financial assessment, as a capital item. It is hard to see that much can be done creatively with annuities, other than perhaps a capital-protected annuity entered into once the capital resources are otherwise down to £16,000 might go some way to ensuring an effective retention of £16,000 rather than £10,000 for inheritance.