How Investment Bonds could help with long term care costs.

Governments and opposition parties are mindful of the rising cost to the State of long-term care provision. Indeed, it figured in the Queen's Speech where it promised that ministers will “seek cross-party consensus on proposals for long-term reform of social care”. So, keeping the issue very much alive.

Whilst the legislation covering long-term care provision varies between the different parts of the United Kingdom, broadly speaking the same assessment rules apply for residential accommodation means testing.
Unlike other forms of savings and investment, which automatically are taken into account in the assessment rules, an investment in the form of an investment bond receives different treatment. During such assessments, local authorities disregard the surrender value of any life insurance policy. However, local authorities are guided to seek independent legal advice with regard to the treatment of investment bonds.

Deliberate acts of deprivation

One extremely important area deserves consideration: this is the area of deliberate deprivation. This is where an investment is made into an investment bond specifically because of care cost considerations. The rule is that if someone invests into an investment bond with an objective of avoiding the sum being included in the local authority`s assessment, then they are running the very real risk of being caught by the deliberate deprivation rules. If they do fall foul of this rule, then the value of the investment bond will be included for the purposes of means testing.

What might cause the local authority to conclude that deliberate deprivation has taken place? The rules are clear on this and they include the motivation for the investment, the timing and expectation of needing the local authority to help pay for the cost of care accommodation.

If the individual, at the time of making the investment, was fit and healthy and could not have foreseen the need for residential care, then this should not fall foul of the rules. However, nothing should be taken for granted as the rules state that deprivation can be considered for resources disposed of, at any time.

Document reasons for suitability

Perhaps the key to this is to take independent financial advice at the time and to document the reasons why an investment bond is suitable. There are a number of reasons and these could include tax efficiency, simplicity, tax deferral and switching of investment funds. However, it should be stressed that the favourable treatment of an investment bond where taken into account for local authority assessment is a benefit, rather than a reason for using it.

In summary, great care needs to be taken with investment bonds to avoid the risk of the deprivation rule being adopted. We therefore would recommend that clients speak with their financial adviser who should look to avoid the ‘care home reason ‘as justification for taking out an investment bond, but focus on other tax benefits.

If you would like to speak to one of our team of independent financial advisers, please contact us.