Dementia Tax: The Facts!
Dementia Tax: The Facts! Part One: The Current System
In the lead up to the General Election on 8 June 2017, there has been a significant amount of media focus on the cost of home and residential care. Many of our clients are keen to understand this confusing topic when they instruct us to draft their wills or undertake some future estate planning. We have therefore decided to clearly explain what is, undoubtedly, a confusing subject:
How is residential care currently paid for?
The means test
At present, if you need your Local Authority to arrange for you to go into a care home they will firstly conduct a ‘financial assessment’ to determine whether how much you need to pay towards this. Their ‘financial assessment’ is a means test which looks at how much Capital and Income you have.
Your Capital is assessed in the following way:
If you have over £23,250 in Capital, the Local Authority will expect you to pay for the full care home fees. This is often referred to as Self-Funding.
£14,250 to £23,250
If you have between £14,250 and £23,250 in Capital, the Local Authority will assume that this generates a regular Income. They will assume that for every £250 over £14,250, you have £1 per week in Income.
It is important to note, however, that this does not have to be a full £250 for each £1 of Income to be assumed. For example: if you have £14,750 in Capital you will be assumed to earn £2 per week Income from this, but, if you have £14,600 in Capital you will also be assumed to earn £2 per week in Income.
If you have Capital of less than £14,250, this will be fully disregarded for the means test. If, at any point whilst Self-Funding your care home fees your Capital falls below £23,250 then you will be re-assessed.
Your Income is assessed in the following way:
The Local Authority will look at how much Income you have on a weekly basis. They will assume you are taking full advantage of any relevant benefits, and will disregard some types of income.
If the weekly income you receive is greater than the weekly care home cost, then you have to Self-Fund your care home fees.
If your weekly Income is less than your weekly care home fees, the Local Authority will (provided the Capital part of the means test is satisfied) take a portion of your income as a contribution to the fee, and top up the remainder.
What about my house?
If you own your own property, this is Capital as far as the means test is concerned and will be included when assessing whether you have to pay care home fees.
If, however, you have a family member who will continue to live in the property after you go into the care home (such as your husband or wife) then it is very likely that your house will not be included in the means test.
This is an important point because if your house is included in the means test, it is almost certain that you will have to pay for your own care home fees.
What is a Deferred Payment Agreement (DPA)?
A Deferred Payment Agreement, or DPA, is way of paying your care home fees using your house. If the Local Authority find that you do not pass the means test and have to self-fund your fees, then rather than paying the fees up front you can agree that the Local Authority can take the fees whenever you sell your house, from the proceeds of the sale. To do this, the Local Authority will register a charge against your property on the title deed.
This does not mean you have to sell your house immediately, but it does mean in the event of your death, your house would have to be sold to pay the care home fees. As a result, the longer you are in care, you more your asset (your house) is depleting.
Examples of how care come fees are funded:
- If a widower living alone has savings of £5,000 and owns a house worth £250,000, he will be assessed as having Capital of £255,000. As only he lives in his house, it would be included in the means test. He would therefore have to self-fund his care home fees. He could agree a DPA to do this, and so rather than reducing his savings the Local Authority could register a charge against his property which would mean that when the property was sold (in lifetime or on death) the fees would be paid.
- If the man in the example above was still married, and his wife was to remain in their house after he went into a care home, it is likely that the property would not be included in the means test. His Capital would therefore be assessed at £5,000 and as a result he would receive some funding for his care home fees.
How is home care currently paid for?
Understandably, on becoming ill or requiring an element of care and assistance, many people would much prefer to stay in their homes and receive care, rather than moving into permanent residential care. Home care is provided and arranged by your local authority. They will firstly assess what your care requirements are, and decide whether you are therefore eligible to receive some of the services they provide. If the local authority find that you have eligible needs, they will then set out their charges for providing these services. A means test will then be conducted to establish how much you will be required to contribute to the cost of the services. It is important to remember that the local authority has discretion over what services it charges for and, to some extent, what it charges.
Another means test
The means test for home care is similar to the means test for residential care and is also based on an assessment of Income and Capital, however there are some significant differences:
Assessment of Capital:
The brackets for the assessment of capital are the same as those for the residential care means test, so, if you are assessed as having capital of over £23,250, it is likely that you will have to pay the full cost of your home care.
Some capital is disregarded for the purpose of this means test and the biggest difference from the means test for residential care is that the property you are living n will be disregarded. This is significant, because this will often be the piece of capital with the highest value.
Assessment of Income:
As with the means test for residential care, there are some types of Income that are disregarded for the means test.
In addition, the local authority must ensure that after payment of your care costs, your weekly income does not fall below the Minimum Income Guarantee (MIG). For 2017/18 this is £189.00 per week for a single person who has reached the qualifying age for pension credit. This can be higher if you are a carer, or receiving certain disability benefits. The MIG must be calculated after your housing costs have been deducted. Housing costs include any rent, mortgage interest payments and/or council tax you pay each week.
As you can see from the above, assessing the cost of home and residential care is very complex, however we have hopefully provided a brief overview of the current system. Recently, significant changes have been proposed and we will discuss the possible effects of these in Part 2: the proposed changes.