Investment Bonds Excluded from the Local Authority Means Test

Following a recent clarification of the guidelines under which local authorities apply the means testing of assets, investment bonds are now to be excluded from the assessment process. Since this form of investment is particularly popular amongst older people, what are the implications for care fee funding.

The Charging for Residential Accommodation Guidelines, more commonly known as CRAG sets out the basis under which local authorities must apply the means testing system. The objective of the means test is to determine the extent, if any, to which individuals are required to contribute towards their care costs when care is arranged by the local authority. The means test determines the amount of assessable capital which the individual has and establishes which assets are and are not taken into account.

Schedule 4, paragraph 13 of the National Assistance (Assessment of Resources) Regulations 1992 confirms that one of the asset classes which should be disregarded under the means test is "the surrender value of any policy of life assurance".

However, over recent years, there has been some uncertainty about the definition of life assurance policies, particularly with regard to investment bonds which are a particular type of policy offered by life assurance companies which are primarily an investment facility. However, these bonds are technically life assurance policies and have been structured this way to provide investors with tax advantages. Many local authorities have sought to include these bonds as assessable assets under the means test, on the basis that the life assurance element is not their primary purpose.

However, a recent update to the CRAG guidelines makes clear that such a view is in fact not correct and has always been an unlawful practice. It goes on to state that any capital assessments which took account of these investment bonds should now be brought to the attention of the authority with a view to obtaining a refund of care fees which may have been incorrectly paid as a result.

Paragraph 6.002B of the new CRAG guidelines states that:

"Councils are advised that if an investment bond is written as one or more life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights has to be disregarded as a capital asset in the financial assessment for residential accommodation".

One of the most common versions of life assurance policies of this type are With Profits Bonds. They are provided by insurance companies and offer investors a smoothing out of the peaks and troughs that are normally associated with equity based investments, through the declaration of annual bonuses. Because of this structure they have been particularly popular amongst older investors, many of whom have subsequently moved into care. Whilst these arrangements were almost always set up for investment purposes, they are technically life assurance policies and as such are dealt with by the CRAG clarification.

So what are the implications of the CRAG update?

The transferring of assets into life assurance bonds as a way of achieving disregard under the means testing arrangements is unlikely to be an effective strategy and will almost certainly be classified as deliberate deprivation.

The new version of CRAG also offers some clarification on this issue when it states in paragraph 6.061 that:

"Deprivation of capital may occur if capital has been used to purchase an investment bond with life assurance. Councils will wish to give consideration, in respect of each case, to whether deprivation of assets has occurred i.e. did the individual place his capital in such an investment bond so that it would be disregarded for the purpose of the Assessment of Resources Regulations".

This clearly raises the issues of motive and timing. The decision to transfer one investment, say cash deposits, into an insurance bond for tax planning reasons may be a perfectly legitimate decision if it is planned well ahead. However, it is likely to be caught under the deprivation provisions if it is a last minute avoidance measure.

So whilst the clarification of these rules do not offer a solution for those seeking to avoid paying for their own care needs it does have serious implications for those who are now funding their own care and have previously invested into these bonds for legitimate reasons.

CareAware Comment

Clearly there will be a need to review individual circumstances to determine if a case exists for a claim to recover fees which might have been incorrectly paid. It is difficult to offer precise guidelines in this respect as individual circumstances are likely to differ considerably both in terms of the value of assets held, the reasons why investment bonds may have initially been selected and the time when such arrangements were made.

	To obtain a copy of this bulletin
	To Return to Previous Page