Equity Release & Deliberate Deprivation of Assets
For many homeowners over the age of 55, releasing equity from the home offers many people a practical way to unlock money that is tied up in their property, without having to sell up and move home.
Many people use the money that they release from their home to supplement their retirement income, to help their children get onto the property ladder, or to pay for home improvements.
Whatever the reason, releasing equity from your home can help you to live more comfortably or help the ones you love.
However, many people also wonder whether taking out an equity release loan will be treated as deliberate deprivation of assets. It’s an understandable concern, especially for anyone who might be thinking about paying for care costs or wanting to plan their finances sensibly.
The good news is that equity release itself is not automatically classed as deliberate deprivation of assets. However, what you do with the money after you take out the equity release loan could potentially become relevant later down the line.
In this blog, we will explain exactly what a deliberate deprivation of assets means, how local authorities assess it, where equity release fits into the picture and how to make better and more informed decisions that will help you further down the line.
What Is a Deliberate Deprivation of Assets?
A deliberate deprivation of assets is a term used when assessing whether someone has intentionally reduced the value of their assets, or their estate, in order to qualify for financial support towards care costs or other benefits [1].
There are a number of ways that people can do this, including giving away large amounts of money, transferring ownership of a property to someone else, selling assets for less than they are worth or putting money into certain types of trusts.
Other people gift their money away to other people. When it comes to a deliberate deprivation of assets, the key thing local authorities are interested in is the intent behind why you have given your money away [1].
Simply spending money, giving it to other people or reducing your assets isn’t automatically considered a deprivation of assets. Instead, local authorities will look at whether they think you have made your decisions so that you can avoid paying care fees.
Does Equity Release Itself Class as a Deprivation of Assets?
In most cases, equity release is not used as a deprivation of assets. Taking out a lifetime mortgage or home reversion plan doesn’t mean you’re giving away your wealth so that you can avoid paying for care costs.
Instead, people who opt for an equity release loan are simply converting some of the value locked within their home into accessible cash, whilst continuing to live in the home. When you opt for equity release, your property remains part of your estate and the funds that are released simply convert into cash and remain yours.
Why Do People Worry About Equity Release and Care Fees?
Lots of people worry about taking equity release out as they worry that it might be considered a deprivation of assets. In fact, many homeowners have heard negative stories about councils investigating finances when someone applies for help with care costs after taking out an equity release loan.
For those who opt for equity release, typical concerns include whether or not the council will think they have tried to reduce their assets, whether they could lose their entitlement to support and whether their family will face problems later down the line.
Unfortunately, the reality is that the answers are very nuanced and depend on your specific circumstances.
What Do Local Authorities Actually Consider?
When assessing whether you have deliberately reduced your assets to qualify for care costs, local authorities don’t simply look at the financial transaction in isolation.
Instead, they generally consider a range of different factors, including some of those listed below for you:
1. What was the reason behind the decision?
If the primary motivation behind opting for equity was paying for home improvements, clearing your debts, supplementing your retirement income or helping with everyday living costs, then these are all considered perfectly legitimate reasons to opt for equity release.
However, if the reason was to give the money away, then this might be examined more closely.
2. Were future care needs foreseeable?
When it comes to opting for equity release, it is important to understand that timing matters.
If someone was fit and healthy, with no indication they would shortly require care, it’s far less likely that taking out an equity release loan years earlier would be viewed as avoiding care costs.
However, if someone released equity shortly after receiving a diagnosis requiring long-term care with high costs, and then they immediately gave the money away to a loved one, then questions might understandably be asked.
3. What was the money used for?
Perhaps the most important factor when it comes to equity release and deprivation of assets is how the released funds were actually used.
Your local authority will likely question what the money was used for, and whether it was a legitimate spending reason.
Many people end up spending their equity release loan on home improvements, including installing stairlifts, accessible bathrooms, mobility adaptations such as handrails.
Other people choose to spend the money that they release on repaying debts or helping families with higher education or getting them on the housing ladder.
It is important to understand that gifting your money to your loved ones isn’t prohibited.
However, if substantial gifts are made at a time when care needs were likely and foreseeable, then your local authority will likely consider whether your motivation was to avoid future care costs.
Does There Have to Be a Time Limit?
One of the biggest myths surrounding equity release and deprivation of assets is that there is a “seven-year rule.’ However, it is important to understand that unlike inheritance tax, there is no fixed seven-year time limit for deprivation of assets and equity release.
It is true that local authorities can examine earlier financial decisions if they believe they’re relevant, however they do not apply a specific timeframe.
Instead, they consider the timing of the translation, the individual’s health, whether care needs were anticipated and the reason behind the decision.
This means that each case is assessed individually on a case by case basis, rather than using a simple cut-off date for everyone who opts for equity release.
What Happens If You Are Found to Have Deliberately Avoided Care Costs?
If a local authority believes that someone has deliberately reduced their assets to avoid paying for care, they can treat those assets as though they still exist. This is known as notional capital.
In practice, this means that your care or financial support can be reduced, you might still be expected to pay towards your care costs, and some councils might even expect recovery from recipients of transferred assets.
It’s important to understand that every case is considered on a case by case basis, rather than applying an automatic rule or penalty to everyone.
Does Equity Release Affect Means-Tested Benefits?
Yes, taking out an equity release loan can potentially impact any means-tested benefits that you are currently receiving or plan to receive in the future. If you release a substantial lump sum and leave it sitting in your savings account, then it might be taken into account for certain means-tested benefits.
For this reason, some homeowners choose to opt for a drawdown lifetime mortgage instead of taking out a lump sum, because only the money withdrawn enters their savings account and might not impact your ability to apply or qualify for any means-tested benefits.
When it comes to equity release, care costs or means-tested benefits, then professional equity release advice can help you to better understand how the different equity release options may interact with your wider financial circumstances, or any changes to your personal life later down the line.
Can Equity Release Be Used to Pay for Care?
Yes, equity release can be used to pay for care costs. In fact, many homeowners use equity release specifically to fund care costs.
This includes paying for a care home, paying for carers at home, purchasing specialist care equipment, making the money safer and more accessible [2].
It is important to understand that using the money that is tied up in your own property to pay for care is entirely allowed and is not, in itself, considered a deprivation of assets.
Why Professional Equity Release Advice Matters
It is important to understand that equity release is a major financial commitment and should be taken very seriously.
Choosing an equity release loan will impact your estate, your future inheritance, your ability to qualify for means-tested benefits, tax planning, retirement income and your long-term financial flexibility.
A qualified equity release adviser will assess why you want to opt for equity release, what you want to do with the funds and will explain the implications before any recommendation is made.
If future care costs is one of your concerns, then it should form part of that wider discussion early on.
It is also important to consider that some clients will also benefit from speaking with an independent solicitor or financial planner, especially if you plan on gifting some of your money away, and care costs are likely later down the line.
Questions Worth Asking Before Opting for Equity Release
Before proceeding with an equity release loan, there are a number of questions that you should consider asking yourself and your equity release adviser. Some of these are listed below for you.
- Why do I want to release equity in the first place?
- How will I use the money that I release?
- Are there any other alternative options to equity release?
- Will I need all the funds immediately, or can I take a drawdown plan?
- How might opting for equity release affect my estate?
- Could it impact any means-tested benefits that I currently receive?
- Have I discussed my plans with my family and loved ones?
- Have I received regulated financial advice?
The Importance of Keeping Records
One simple but often overlooked step is the importance of keeping up to date records of why equity was released and how the funds were spent.
For example, you should keep any invoices for home improvements, care costs, debt repayments or accessibility adaptations so that you have proof of exactly what your equity release loan was spent on.
Whilst many homeowners never need to rely on this information, maintaining clear records is simply good practice in case anything ever goes wrong or is queried in the future.
Conclusion
For most homeowners, taking out an equity release loan is for genuine reasons, including retirement planning, home improvements, paying off debt or improving your quality of life. None of these reasons would be considered a deprivation of assets.
It is important to understand that the greater consideration is what happens to the released equity afterwards.
If local authorities believe that you have deliberately disposed of your wealth in an attempt to reduce your future care costs, then they will examine your case in detail.
If you are considering taking out an equity release loan and are concerned about future care costs, then seeking expert advice can help you to better understand your options and will also help you to choose the most suitable plan for your specific circumstances.
If you or someone you know is considering taking out an equity release loan, then you should speak to the team at Equity Release Warehouse about your different options.
Your adviser will be able to recommend the best loans for your specific circumstances, taking into account the motivation behind your choice to release equity and what you plan on spending the money on.
To speak to our friendly and helpful team, call the advisers at Equity Release Warehouse for free and confidential advice.
