Fair Deal Scheme Scenario

[Jimjobjim]

Hi folks,

Take this scenario, a retired aunty on a pension has two nieces, is going to leave her entire estate to her two nieces which involves a property and large savings, now aunty very ill and going to have to go full time into a nursing home, aunty will be charged for the full rate and will not be able to avail of fair deal scheme because of large savings.

Is there any logic to aunty moving entire inheritance to nieces now and for nieces to pay for her care as they could claim back at a higher tax rate, I understand that she will still have to pay full rate as hse go back five years but is there any sense of making this kind of move, I also understand nieces will be hit with gift tax but they would have been hit with the tax anyway when aunty passes on.

Is there any logic to moving her assests to her two nieces why she is still alive?

Thoughts would be greatly appreciated

 

[Jimjobjim]

Any comments on above folks?

 

[Black Sheep]

Could those nieces pay for her care (or part of that) and claim the tax on it, and deal with the inheritance tax after Aunty has passed on.
Can't see the logic in moving assets now.

Warning! I am not a tax expert.

 

[Slim]

I think it would depend on the respective tax rates of the nieces. If the aunt applies for Fair Deal and is assessed very high due to savings, she might be as well to pay her own nursing home costs and claim the tax relief herself. The assessment on her home will cease after 3 years. The cost of nursing home fees will reduce her savings which will lower the assessment. However, if she gifts the savings to her nieces, they will still be counted for up to 5 years. If her savings are very high, she may not receive the fair deal contribution for many years, if ever.

You would need to post specific numbers to work it out.

 

[Jimjobjim]

Hi Folks, thanks a lot for replies, ok let give a bit more detail on this scenario , let’s say house is valued at approx 800000 and savings of approx 800000 from my assessment she would have to pay full rate of care and cannot go fair deal. Slim you make a fair point that her savings will reduce so in time she could become eligible, however can I clarify two points, if aunt was to move everything she has now would that mean that in five years time she coukd only be assessed on her state pension and would then get full fair deal scheme? Also aunt has just been in receipt of state pension for last number of years so am I correct in saying because of this she could not claim any tax relief? Also just to say nieces could not pay full cost of private care but could make contribution and then claim back the forty percent they pay, I guess that was the logic of moving all the assests now as they would have the funds to pay for her full care and claim the full 40% as both work and are in that tax bracket, however if aunt could claim her own tax relief then that would be something I wasn’t aware of and would change the need to move assests now. Any clarification would be much appreciated

 

[Dr.Debt]

I think the key to this riddle depends on the life expectancy of dear aunty.

Plan A
If the decision is to stay out of the fair deal scheme for now and the next five years, and to transfer 1.6m of assets to the nieces now, the following is relevant :
1)There is an immediate CAT bill of half a million for the nieces.
2)If the property is transferred, then stamp duty is payable on this also (unless the property is sold by the aunt)
3)Tax relief on nursing home fees, based on 50,000 per year, will save up to 25000 on income tax for the nieces
4) The nursing home fees of say 50,000 need to be paid each each year for five years
5) A fair deal application after five years will still raise a FD assessment on the aunt of 80% of her pension income so the FD cost is not avoided completely
6) Pension income is assumed to be 10K per year
7) Net cash flow for five year period is 1600K - 500K - 250K +125K +50K leaving an ending balance of 1025K
8) In year six she can apply for fair deal and pay only 80% of her pension = 8K

Plan B
If the decision is to enter the FD scheme now and NOT gift the assets, the following is relevant :
1) The aunt pays 250K to the nursing home over five years
2) She earns 10K per year pension
3) Net cash flow for five year period is 1600K - 250K + 50K, leaving an ending balance of 1400K
4) In year 6, she is assessed only on her cash balance of 600K plus 80% of her income which means she is still paying her way 100%

So the conclusion is that she saves slightly by staying out of the FD scheme for five years and gifting her assets now. The main saving is the tax relief to the
nieces but the down side is the messy handling of her assets now, selling the property etc and the stamp duty implications. The house could take a year
to sell which would reset the FD clock to six years instead of five. If the aunt lives for longer than six years, then the attractiveness of Plan A is greater.
If the aunt passes away within five years, the attractiveness is limited to the income tax credits less the stamp duty (if any) On the other hand if the 800K cash can be invested at 3%, the difference between plan A and plan B is miniscule over five years. If the aunt lives longer than 5 years, plan A is likely to be better.

Other considerations :
The value of the house might go up or down in five years
CAT rates might go up or down (most likely down)
The rules of the FD scheme may change

Personally, I would opt for entering the FD now, not gifting the assets and instead seeking to invest the 800k cash @ 3%

 

[twofor1]

Is there any logic to moving her assests to her two nieces why she is still alive?

Thoughts would be greatly appreciated

In this case aunty has substantial savings and could easily fund her own nursing home care for at least the next 10 years. Why move assets, can’t see aunty benefitting from this arrangement, so why go there ?

Particularly as aunty is very ill, it’s probably unlikely she will live beyond her substantial savings, if she does live a long time, assistance can be applied for nearer that time.

If I was aunty I would like my house and cash to remain mine. My two nieces can have the house and whatever cash is left when I’m gone, not before.

Of course if aunty wants to move her assets now, fair enough. But it does seem very complex with many uncertainties.

 

[Jimjobjim]

I think the key to this riddle depends on the life expectancy of dear aunty.

Plan A
If the decision is to stay out of the fair deal scheme for now and the next five years, and to transfer 1.6m of assets to the nieces now, the following is relevant :
1)There is an immediate CAT bill of half a million for the nieces.
2)If the property is transferred, then stamp duty is payable on this also (unless the property is sold by the aunt)
3)Tax relief on nursing home fees, based on 50,000 per year, will save up to 25000 on income tax for the nieces
4) The nursing home fees of say 50,000 need to be paid each each year for five years
5) A fair deal application after five years will still raise a FD assessment on the aunt of 80% of her pension income so the FD cost is not avoided completely
6) Pension income is assumed to be 10K per year
7) Net cash flow for five year period is 1600K - 500K - 250K +125K +50K leaving an ending balance of 1025K
8) In year six she can apply for fair deal and pay only 80% of her pension = 8K

Plan B
If the decision is to enter the FD scheme now and NOT gift the assets, the following is relevant :
1) The aunt pays 250K to the nursing home over five years
2) She earns 10K per year pension
3) Net cash flow for five year period is 1600K - 250K + 50K, leaving an ending balance of 1400K
4) In year 6, she is assessed only on her cash balance of 600K plus 80% of her income which means she is still paying her way 100%

So the conclusion is that she saves slightly by staying out of the FD scheme for five years and gifting her assets now. The main saving is the tax relief to the
nieces but the down side is the messy handling of her assets now, selling the property etc and the stamp duty implications. The house could take a year
to sell which would reset the FD clock to six years instead of five. If the aunt lives for longer than six years, then the attractiveness of Plan A is greater.
If the aunt passes away within five years, the attractiveness is limited to the income tax credits less the stamp duty (if any) On the other hand if the 800K cash can be invested at 3%, the difference between plan A and plan B is miniscule over five years. If the aunt lives longer than 5 years, plan A is likely to be better.

Other considerations :
The value of the house might go up or down in five years
CAT rates might go up or down (most likely down)
The rules of the FD scheme may change

Personally, I would opt for entering the FD now, not gifting the assets and instead seeking to invest the 800k cash @ 3%

Thanks so much for the reply, this is really helpful.

 

[Jimjobjim]

In this case aunty has substantial savings and could easily fund her own nursing home care for at least the next 10 years. Why move assets, can’t see aunty benefitting from this arrangement, so why go there ?

Particularly as aunty is very ill, it’s probably unlikely she will live beyond her substantial savings, if she does live a long time, assistance can be applied for nearer that time.

If I was aunty I would like my house and cash to remain mine. My two nieces can have the house and whatever cash is left when I’m gone, not before.

Of course if aunty wants to move her assets now, fair enough. But it does seem very complex with many uncertainties.

Thanks for reply, I guess the reason is that Aunty wants to leave as much as she can and also wants to ensure house remains in family and isn’t sold as there will be a huge tax bill coming down the line and if there are ways to reduce impact on her savings if she is in for long term in nursing such as nieces paying her bills and then not being charged after five years that could make a big difference otherwise it could likely end up with house being sold to pay tax bill if there’s s a long term stay in home.