Growing numbers of parents and grandparents are handing over cash gifts to help their loved ones while reducing their potential inheritance tax bills. But what few realise is that they could be at risk of falling into another trap.
Financial advisers warn that local councils are increasingly demanding that those gifts are returned to help pay for care home fees.
Even cash gifts that were made as long as 20 years ago can come under scrutiny. So how can you make financial gifts to your family safely, without the risk of the local authority coming for the money many years later?
How do people come unstuck?
In theory, you can give away as much wealth in your lifetime as you like without risking a tax bill – so long as you survive for seven years after making the gift.
If you die within seven years, the gift could be subject to inheritance tax at a rate that tapers from 40 per cent downwards, depending on how many years have passed.
However, where givers come unstuck is when they need care further down the line.
You can give away as much wealth in your lifetime as you like without risking a tax bill – so long as you survive for seven years after making the gift
If you have wealth of at least £23,250, you have to pay for your care home fees in full. You must pay something towards them if you have more than £14,250. If you have less than that, the local authority will cover the fees. But before it pays out, the council looks at how much wealth you have – including the value of your home, pension and investments and other sources of income.
Certain benefits won’t be counted, such as disability living allowance, and you can keep an allowance of at least £30.15 a week.
Your home won’t be considered as an asset that could help pay for care if your spouse or partner continues to live in the property, you have a dependent over 60, under 18 or has a disability, or for care home stays of less than 12 weeks.
The local authority will also ask about gifts that you have made in recent times. If it decides that you made them for the purpose of reducing your wealth so that your care home fees are paid for, it can force you to claw them back.
Giving away savings so you don’t have to pay for care is known as ‘deliberate deprivation of assets’.
Local authorities will look at gifts made up to two or five years before care is required.
However, Cate Searle, a director at Martin Searle Solicitors, says she has seen cases where they have looked at gifts given between 15 and 20 years previously.
‘Lots of people are wrongly accused of deprivation when there are legitimate arguments for what they did,’ she says.
‘We’ve had cases where someone had no intention to deprive and thought they were doing inheritance planning.
‘The issue we have is that local authorities are almost always suspicious of any gift or transfer.’
Why is this problem happening now?
Cash-strapped councils are increasingly trying to force families to pay back gifts to go towards care home fees.
Councils are sitting on debt piles of around £122 billion and are facing ever higher care bills as costs and demand soar. At the same time, growing numbers of older family members are passing down wealth to reduce their potential inheritance tax liability as more estates are trapped in its net.
Searle says that a quarter of client enquiries now relate to either an allegation of deprivation or someone trying to avoid an allegation.
‘There has been an increase in negative decisions by local authorities,’ she adds. ‘They are more likely to look at something they might not have investigated in the past.’
And as the financial pressures on councils get even heavier, Ian Cook, financial planner at Quilter Cheviot, predicts there will be harsher decisions made.
‘Without a doubt, this will crop up more,’ he says. ‘Local authorities are funding the care from their own resources, and if spending is cut or frozen due to financial struggles, they’ll be affected. Whereas before they might have been ambivalent, they’re probably much more likely to root around to find any money they can.’
Cook warns that more cases could arise in future as people give away or spend their pensions quicker. Pensions will be swept into the inheritance tax net from April 2027, which means there will be less incentive for people to hold on to theirs.
‘People will have been encouraged to spend their pensions, so if they have to go into care there’ll be nothing left,’ he says.
How can you give away money safely?
Firstly, experts advise it is not a good idea to give away money for the purpose of reducing your care home bill, tempting as it might be.
For example, if you give away £500,000 to family members and shortly afterwards you need care, the local council could decide that the gifts you made were deliberate deprivation and treat you as if you still have the money.
That means you would have to pay for your own care – even if you no longer have the money.
Section 70 of the Care Act 2014 gives councils power to recover care charges or debt from a third party – in other words, the person who received the funds from you. If neither of you can pay, it can end up in court.
The council could go as far as seeking a charge against your property, which could end up in a sale being forced.
Cook says: ‘People think they can try it and it’ll work, but they’re not aware that local authorities are well-versed and are looking out for this.’
Each local authority will have their own definition of ‘deliberate’, he says. Broadly, the council will consider motivation – that is, what evidence there is of your intentions and if you made any consideration for future care needs.
They will also look at your health. If you have worsening health when you make gifts, the council could argue you knew you would need care soon and deliberately gave away money in advance.
You may reduce your chances of a challenge by having evidence that you are in good health when making gifts.
Searle recalls a case where a widow had gifted part of the proceeds of a house sale to her two sons two years before she needed care. The council argued that the gift had been deliberate deprivation, but Searle and her colleagues successfully challenged the council by pointing out that the widow did not need care at the time that she made the gift.
If you’re able to prove that the gift is part of a regular pattern, or for a significant life event such as marriage or education, that will make it harder for the council to prove that your intention was a deliberate deprivation.
But perhaps the best way to avoid the risk is to ensure that you have enough money to fund care should you require it – and only give away wealth that you are sure you won’t need yourself.
Care homes cost around £949 a week on average, and nursing homes £1,267, according to charity Age UK. The amount you need will vary according to where you live.
Lisa Caplan, director of direct advice at wealth manager Charles Stanley, says: ‘Our rule of thumb is £100,000 a year for the last three years of your life.’
Lucie Spencer, financial planner at Evelyn Partners, adds: ‘When we’re running cash flow assumptions, we assume five years’ care at home and five years in a care home. We’ll look at location because it’s cheaper up north than in London, and we’ll look at what kind of home you’d like to live in.
‘We increase the amount needed year-on-year by more than inflation because care home fees increase by more than that.’
If you are making gifts to reduce your potential inheritance tax bill, you should have solid evidence that this was your motivation and not to avoid care home fees.
‘If a client has very solid written advice, preferably disclosed from a credible financial adviser, that explains the wealth transfers are about inheritance tax mitigation, then you do have a chance of defeating the local authority’s decision,’ says Searle.
All estates have a tax-free allowance of £325,000 on which no inheritance tax is payable. Married couples and those in civil partnerships can combine their allowances to pass on a total of £650,000 tax-free, and those passing on family homes to direct descendants have a combined allowance of £1 million.
It is much easier to explain gifts if your beneficiaries are likely to have an inheritance tax liability than if they don’t.
‘Quite often the council will ask whether the client has another reason for transferring the asset,’ adds Spencer. ‘If there’s no inheritance tax liability, then why are you gifting your home? The reduction of inheritance tax needs to be the primary driver.’
Another option is to buy an annuity to cover care fees.
A care annuity, also known as an immediate needs annuity, generates a guaranteed income and gives families peace of mind that a portion of care needs will be covered.
You won’t pay income tax because the annuity is paid directly to the care provider.
You will need to go through a financial adviser to purchase one, because they are not suitable for everyone. The cost will depend on your health difficulties and life expectancy.
Annuity provider Just says it would cost a 75-year-old £99,202 on average to buy an initial income of £20,000, but the cost falls the older you are.
It’s very unlikely the local authority will accuse an individual who has bought a care annuity of deprivation.
‘You’re purchasing it as a way of sustaining your ability to pay for your care needs,’ says Searle. ‘I object to any local authority that automatically says purchasing a care fee annuity is deprivation.’
The Local Government and Social Care Ombudsman saw a 28 per cent rise in complaints about charging for care services in 2024.
A spokesman said: ‘We know decisions about where to place loved ones in care can be really difficult for families, not least because of the costs involved.
‘And we also know that councils are having to make difficult decisions when funding care for people in their areas, especially given the budgetary constraints they face.
‘Deprivation of assets decisions are always nuanced, difficult and quite often emotive, so it is all the more important that councils get assessments right.’