Dependence on inheritance

A survey conducted by HSBC and released in April this year has shown that people are becoming more reliant on receiving inheritance from their parents to fund their retirement, rather than saving during their lives.  It was also in April that the Care Home Act 2014 came into force and with it will come greater scrutiny by local authorities on care home fee avoidance schemes.

The HSBC study, ‘The Future of Retirement Choices for later life’, surveyed over 16,000 people in 15 countries.  It revealed that 51% of working age people expected to receive an inheritance, and two thirds of this group planned to use it to help fund their retirement.  “The long term issue with this is that as we see people live longer, their ability to leave an inheritance gets smaller” explains William Ware, Private Client Lawyer.  “This is highlighted in the report which found that 74% of people said that they planned to leave an inheritance, but only 29% definitely expected to be able to do so, and this is before we consider that 21% of those surveyed agreed that it was better to spend their own money and not leave it to their children.”

This survey focuses attention on the need for careful planning.  “Wealth management companies are quick to advise that entering into lifetime settlements will offer the ability to pay (if we wish) and avoid (if we prefer) care home fees,” William explains.  “The theory is that the parents’ home is transferred into a settlement, under which they retain a right of occupation but the home is managed by the children.  If in the future the parents then need local authority care, the home is supposedly excluded from local authority assessments. Sadly the theory is now likely to be challenged aggressively by the local authorities!”

Under this arrangement, Inheritance Tax would be immediately chargeable at the time of the transferring to the settlement.  William continues, “Capital Gains Tax will not be chargeable if the parents have continued to be residents of the property.  The reality is that parents entering into such a settlement are not concerned with saving Inheritance Tax or Capital Gains Tax, but simply trying to preserve perhaps a relatively modest asset for their family as a shield against care fees.”

There are several issues with this as an option for the future.  William explains, “One concern is that by following this path, parents are putting their main asset beyond their control.  More importantly however, arrangements such as lifetime settlements will be closely examined by the local authority and could be subject to further challenge under the Insolvency Act.  The Care Act 2014 strengthens local authorities’ powers to check individuals’ financial situations.  By obtaining access to financial information, the local authority can judge whether a person has intentionally given away their assets in order to reduce the amount they are charged towards care. If so, there will be a deemed intentional deprivation of assets and the home may still have to be sold.”

William concludes, “The introduction of the Care Act 2014 only added to our prior concerns about lifetime trusts, and we advise that the only safe way of preserving half share in the home is to deal with it by Will.  By doing so, the first spouse to pass away can leave his or her interest in the matrimonial home in his Will in a trust, in which the surviving spouse has a right to occupy.  The share of the home owned by the deceased spouse is ring fenced and will not be treated as deprivation of capital. It is a legitimate testamentary disposition by the spouse who was not, at the date of death, dependant upon care.   Wills are also considerably cheaper than setting up lifetime trusts and can offer peace of mind to families worried about the shifting sands of the local authority assessments.”

To find out more about how you can protect your future by making a Will, contact William or a member of the Private Client team on 01329 222075 or visit their section of the website.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.

Notes:
Choices for later life is the 11th report in The Future of Retirement series and was published in April 2015. It represents the views of more than 16,000 people in 15 countries and territories: Australia, Brazil, Canada, France, Hong Kong, India, Indonesia, Malaysia, Mexico, Singapore, Taiwan, Turkey, the United Arab Emirates (UAE), the United Kingdom and the United States. The findings are based on a nationally representative online survey sample covering people of working age (25 and over) and those in retirement. The survey was conducted online by Ipsos MORI in August and September 2014, with additional face-to-face interviews in Indonesia and the UAE. Read the full report.)