So you thought you would inherit the family home

If one of your parents is worth more than pounds 8,000 and in need of long-term care, think again. By Simon Pincombe

When John Major spoke of his vision of "wealth cascading down through the generations'' in his first party conference speech as Prime Minister it was taken for granted that an increase in home ownership and rising house prices would deliver the promise on a plate. That he had to return to the subject in this summer's leadership election manifesto was official recognition that expectations had gone badly awry.

The hypothesis that older people will provide a growing source of wealth transfer has come under intense scrutiny. As the National Health Service withdraws from long-term care (the number of geriatric beds has fallen from 75,000 in 1970 to 54,700 in 1994), retired homeowners have increasingly been forced to sell or borrow on their properties to pay for residential or nursing home care. What for many families looked like a tidy sum for the grandchildren's education is now under threat.

The impact of this quintessential middle class plight - first highlighted by Labour's Social Justice Commission - has not been lost on the Government, in spite of some popular misconceptions about the changes in the financing of long-term care.

Social care has been means-tested since the 1948 National Assistance Act. What changed in April 1993 with the enforcement of the Community Care Act was the method of means testing and the way in which the state claws money back from those who fail.

Under the old rules an elderly person with capital of more than pounds 8,000, including his or her home, was still liable to meet the costs of residential and nursing home care. But the state allowed 26 weeks (during which it paid) if the home needed to be sold in order to pay the bills.

The pounds 8,000 assets threshold still applies. But the patients are now liable as soon they go into homes and local authorities have wide powers to recover money, sometimes with interest.

In devolving the responsibility of long-term care to local councils, the Government has ensured that most old people are now acutely aware of the problems. Stories of pensioners being evicted from their properties to pay for long-term care are now common and the issue has leapt to the top of the political agenda.

Age Concern reports a sharp increase in the number of panic phone calls it receives from elderly people wanting to know how they can transfer assets to their family to avoid their estate being swallowed up by residential and nursing charges. And the fledgling industry catering for long-term care insurance says business growth is explosive.

PPP Lifetime, a subsidary of Private Patients Plan and the market leader in long-term health insurance, now has 10,000 policies. "Most have been taken out in the last year and growth is exponential,'' says spokesman Chris Cummins. "Many younger people are asking how they can insure their parents.''

Individual cases highlight the huge expense and severe distress to elderly people who have saved hard all their lives in the belief the state would support them in their final days. Now they are seeing their savings taken from them to pay for that care.

But the numbers, while politically sensitive, are not large. Most elderly people never end up in a home. Over 75 per cent of people over the age of 85 in the UK are not in residential or nursing homes.

But in his report, Inheritance in Britain: the disappearing billions, Professor Chris Hamnett of Kings College London estimates that between 48,000 and 60,000 people need residential or nursing home places each year. Of these he reckons between 32,000 and 40,000 will need to sell their houses to pay for care. This represents an equity withdrawal of pounds 2.5bn a year - money that should be "cascading down through the generations''.

Of those going into residential care the average stay is three years for men and seven for women. Independent estimates put the average annual cost of private residential care at pounds 15,000 and of nursing home care at pounds 17,000.

Whether your family becomes one of the 40,000 affected depends in part on where you live. The withdrawal of the NHS from long-term care is by no means uniform geographically. As the case of Edith Dunbar (see picture caption) illustrates, conditions which would still be treated under the NHS in some parts of the country are now being released to Care in the Community in others.

However, Age Concern's advice to callers has been not to be rushed into signing over property to avoid paying for bills. Those bills might not arrive, or if they do, turn out not to be as collossal as feared. Transferring property may not work anyway and the move can have disadvantages.

With the problem expected to get worse as the NHS withdraws further from long-term care, the Government is under pressure to produce a short-term fix. The first move, likely to come in the Budget, will probably raise the pounds 8,000 threshold. Suggestions that homes should be taken out of the assets calculation are likely to be too expensive.

Discussions on longer term solutions centre on a number of options. These include: tax breaks to encourage people to take out old age protection plans; a compulsory insurance scheme; allowing nursing home patients to invest the capital from selling their house in a trust and using income to pay care bills; new-style private residential and nursing homes where residents could buy a lease that could be passed down to children and sold; taxprivileged "care bonds" to encourage savings for old age care.

The problem with long-term insurance and savings, however, is that it will be 40 years before you see the benefit.

Community Care rules and your options

Local authorities will not normally pay for residential or nursing home care if the patient has capital worth more than pounds 8,000. And that includes the value of the home. Where care is supplied in the home, the patient's contribution to costs are at the discretion of the local authority. The financial planning options are limited.

Transfer of property

Legal opinion is divided over transferring property (or other assets) to children as a way of reducing capital below the pounds 8,000 limit. The practice of giving away capital in order to qualify for a means-tested benefit is termed "deliberate deprivation'' and the law gives local authorities the power to pursue the patient, or the new owner of the assets, for the full cost of care if those assets were deliberately transferred up to six months before the patient entered the home.

If the assets were transferred more than six months before the patient went into care the local authority cannot pursue the third party. But it can present the patient with a bill based upon "notional capital''.

Different local authorities apply different interpretations when considering deliberate deprivation and it is not yet clear to what extent local authorities will pursue alleged debts in respect of transferred assets. Some will automatically assume deliberate deprivation if the property was transferred up to seven years before the patient entered the home. It is up to the patient or his or her family to prove otherwise.

Transferring property can have big disadvantages. Once signed over, it can no longer be sold or used to raise income or further capital Also, if the donor remains in the flat rent-free this will count as a gift for inheritance tax purposes. Moreover, if the new owner marries, divorces, or dies it may affect the donor's right to stay in the property.

Insurance

The leading insurers for long-term care insurance are PPP Lifetime and Commercial Union. Further information can be obtained from the Association of British Insurers, which issues best practice guidelines.

Plans can be funded from capital or income and the cost will depend on age and the level of benefits required. But remember, long-term care insurance is not regulated and there is no standard definition of the so-called "daily living activities'' that can be insured, such as mobility, mental impairment, abilitity to wash and dress and so on.

A popular option is to insure people who retire only for the difference between their pension income and the estimated care bills. Men are cheaper to insure than women. But there are discounts available for couples.

At the age of 89, and suffering from dementia, Edith Dunbar was forced to leave Moorgreen Hospital in Southampton. When a ward was closed, staff told her they no longer had the space. Her daughter, Mrs Glenda Thompson, was told by the social services department attached to the hospital that she would have to sell her mother's house to pay the pounds 310 a week required by a nursing home. Mrs Thompson calculates that by October next year, all the capital from the sale of her mother's pounds 43,000 bungalow will have been spent on nursing home fees.

The house had been left in Mrs Dunbar's will to her two daughters, who now may not see a penny. "They leave you just pounds 3,000, to pay the cost of the funeral," said Mrs Thompson. "It's very unfair. My parents were frugal, and struggled to buy their own home. My sister and I paid for central heating to be put in only for the Government to take everything back again. If people wasted or spent their money, they get as good if not better treatment than the ones that struggled."