Care Fees Planning: Bonds and Trusts

Philip Laidlow examines the treatment of Bonds and Trusts in the context of Care Fees Planning.

The house is the focus of most planning but even the most sophisticated planning over the house will do no good if, as is frequently the case, the house owner has other available capital which would be well over the financial assessment limits and available therefore to cover fees. There seems to be a growing awareness of this, and a trend to shelter liquid assets in an insurance company bond, and beyond that even to put the bond into a trust. This seems to be a belt and braces approach - get the wealth into a bond as a disregard and also put it into trust so it is not personal capital in any event. This was touched on in Volume 1 Issue 4, but given the increasing frequency of the technique, this article looks at it in a little more detail. The focus is on the disregard and deprivation aspect. I do not address the basic and preliminary question of whether such planning is appropriate at all or whether it is planning which allows the tail to wag the dog. The investment considerations will also be a relevant factor for anyone contemplating this type of planning, and sometimes even the CGT considerations (dependent on what assets one is moving from).

Is a Bond disregard?

Schedule 4 paragraph 13 of the National Assistance (Assessment of Resources) Regulations, if backtracked through the Income Support Regulations, says that the surrender value of a life insurance policy is a disregard. The question therefore is whether a bond is an insurance policy? I am not aware of any formal definition of a life policy in the Regulations, the parent legislation or in any relevant Income Support legislation. If one falls back on life assurance law then a life policy is defined as a contract between a life office and an individual where the life office guarantees to pay a certain sum of money in return for premiums paid, the occasion of payment depending in some way on the duration of a human life or lives.

Clearly bonds do turn on human lives. A more difficult question is whether they have anything in the nature of a claim value which could be said to be a contracted return for a single premium as opposed to a return of a premium itself. Following the Fuji Finance litigation, it would seem that 101% return on death should be sufficient to categorise a bond as a life policy; the additional 1%, albeit relatively small, distinguishes the claim value from the premium paid. A bond certainly has a surrender value which is what the regulation actually focuses on. A surrender is simply the cashing in of a policy before it becomes a claim. A bond can fit this analysis; the return on death is a claim.

Deprivation - the Bond?

The question of deprivation arises twice. First, is the purchase of a bond an act of deprivation? Regulation 25 is wide enough to focus on individual capital assets (as well as capital as a whole) and is wide enough to cover the disposal of one type of asset and the acquisition of another irrespective of the overall wealth level being maintained. The purposive element of deprivation would still need to be shown by the LA i.e. was the bond bought with a view to minimising exposure to care fees contribution. Ordinarily a move into a disregarded asset might raise some presumptions, but all the other surrounding circumstances will be relevant - age, current health, marital status, etc. Highly relevant will be whether the person has previously invested in bonds or currently has existing bonds. Bonds are a common medium of investment. They have certain characteristics, e.g. the ability to draw a regular tax free income, which are perceived as an advantage and on the basis of which they are widely sold. The point is - without in any way endorsing or criticising bonds - that investment in a bond is a rational investment decision, easily explicable by several other factors than care fees planning. An LA is likely to have a hard time showing the purposive element of deprivation and this will be particularly so where there is a relevant investment history in bonds or life products generally.

Deprivation - Trusts?

It seems to be accepted that the deprivation provisions can equally apply to the disposal of a disregarded asset. Therefore placing the bond in trust is potentially deprivation if the purposive element is there. Health, age, etc. all come into it as usual, but in principle (if one focuses purely on the act of putting the bond into trust) there are not a huge number of obvious or regular explanations for doing so. An LA might be off to a better start in showing purposive deprivation in this scenario than in many others. That may not of course get the LA very far if the effect is simply to ignore the transfer into trust but for the resulting notional capital to be the bond.

However, an LA would probably not be confined to treating the purchase and the putting in trust as two isolated operations. Certainly the putting of the bond into trust could be used by the LA as one element of the evidence with which to show deprivation in investing in the bond. More importantly and beyond that, the language of Regulation 25(1) is wide enough in combination with a lack of a definition of `capital' to allow the purchase of the bond and the putting into trust to be viewed and treated as potentially one piece of deprivation.

The Regulations are secondary legislation without the precision of a tax statute. However, if the investment and trust are genuinely separate in time, the wider view of deprivation would not apply.

Conclusion

There may be an element of overplanning, rather than belt and braces here. Any sheltering benefit achieved by investing through bonds is potentially going to be reduced by the additional step of adding a trust.

Philip Laidlow, Associate Solicitor - Eversheds