Pension tax changes could leave families facing huge care home bills if they do not undertake careful inheritance tax (IHT) planning with deprivation of assets a clear risk.

The overhaul of pension tax will see unused defined contribution pension pots become subject to inheritance tax (IHT) from April 2027.

 

The move has prompted a surge in older people withdrawing large sums from pensions and gifting money to children and grandchildren in an attempt to reduce future tax bills.

 

But councils are becoming far more aggressive in investigating whether people have deliberately given away assets to avoid paying for care, known as deprivation of assets.

 

While some are making hasty decisions that could have significant impacts later on, accountants are increasingly encountering clients seeking guidance on the potential impact of future care costs on retirement resources and estate planning objectives.

 

The financial impact on families

 

For many clients, the prospect of paying for long-term care can have a profound impact on lifetime financial planning.

 

Residential care costs continue to rise, with nursing home fees frequently exceeding £1,500 per week in some regions. Extended periods of care can therefore erode assets rapidly, affecting retirement planning, inheritance expectations, and intergenerational wealth transfer.

 

While advisers must be mindful of the rules surrounding deliberate deprivation of assets, there is significant value in helping clients understand the potential funding landscape well before care becomes necessary.

 

The interaction between care funding assessments, property ownership, inheritance tax (IHT) planning, trusts, pensions and broader wealth management considerations can be complex. Early discussions allow families to make informed decisions rather than reacting during periods of crisis.

 

What is deprivation of assets?

 

When someone applies for local authority support with social care costs, councils carry out a financial assessment to determine whether the person should pay for their own care.

 

If officials believe someone intentionally reduced their savings or property to avoid care fees, they can decide that deprivation of assets has taken place.

 

Common examples include:

 

  • gifting large sums of money to relatives;

 

  • transferring ownership of property;

 

  • placing money into trusts;

 

  • selling assets below market value;

 

  • extravagant spending; or

 

  • converting savings into assets that may not count in a care assessment.

 

Surprisingly, there is no time limit on how far back local authorities can look. If deprivation is found, the council may treat the person as though they still own the money or assets that were given away. This is known as “notional capital”.

 

In some situations, authorities may even attempt to recover money from family members who received gifts.

 

With people living longer and spending more years in later-life care, the financial impact of getting these decisions can be substantial.

 

Difficult conversation

 

The proposed IHT changes place accountants and financial advisers on the front line of difficult conversations about pension withdrawals, gifting strategies and long-term care planning.

 

Many clients are understandably focused on reducing future IHT liabilities. However, it is important to ensure that tax planning is not considered in isolation from potential social care funding consequences.

 

A significant pension withdrawal followed by a substantial gift may achieve an IHT objective, but it could also create future difficulties if the individual later requires residential or nursing care. Local authorities will often examine the reasons behind major transfers of wealth when assessing whether deprivation of assets has occurred.

 

It is important to encourage clients to consider:

 

  • whether sufficient assets will remain available to meet potential care costs;

 

  • the client’s age, health and foreseeable care needs at the time of any gift;

 

  • whether detailed records exist demonstrating the rationale for the transaction;

 

  • the interaction between inheritance tax planning and local authority charging rules; and

 

  • whether specialist legal advice is required before implementing significant wealth transfers.

 

From a risk management perspective, maintaining a clear audit trail is essential. Contemporary file notes, cashflow modelling, written recommendations and records of discussions about future care needs may prove invaluable if a local authority later questions the purpose of a transfer.

 

The imminent changes to pension pot tax highlight the importance of taking a holistic approach to succession planning. Tax efficiency remains important, but it should be balanced against the possibility of future care costs and the growing scrutiny local authorities apply to historic gifting arrangements.

 

What evidence should families keep?

 

Careful record-keeping is becoming increasingly important. Families making significant gifts should keep:

 

  • written financial advice;

 

  • notes explaining why gifts were made;

 

  • evidence of retirement planning;

 

  • cashflow forecasts showing enough money was retained for future needs;

 

  • medical information about the person’s health at the time; and

 

  • records showing any history of regular gifting.

 

This evidence may later help demonstrate that the main purpose of the gift was genuine estate planning or family support — rather than avoiding care fees. Without proper documentation, defending a deprivation of assets allegation can become much harder.

 

Timing can make a difference

 

One of the biggest factors councils consider is whether care needs were foreseeable when the transfer happened. For example, gifts made decades before any health problems arose may be easier to justify than transfers made after a dementia diagnosis or increasing frailty.

 

Authorities will often examine:

 

  • the person’s age;

 

  • their health at the time;

 

  • whether they were already receiving care;

 

  • the size of the gift; and

 

  • whether enough money was retained to remain financially secure.

 

Powers of attorney could create additional risks

 

Another growing concern involves attorneys acting under Lasting Powers of Attorney (LPAs).

 

As IHT worries increase, some families are encouraging attorneys to make large gifts on behalf of elderly relatives.

 

But attorneys must always act in the donor’s best interests. They are legally required to consider the person’s future financial security and care needs, not simply reduce inheritance tax. Large gifts made without proper authority could later be challenged by the Office of the Public Guardian, the Court of Protection or local authorities.

 

Conclusion

 

As the population ages and demand for care increases, the financial consequences are being felt not only by those requiring care but also by families attempting to preserve financial stability and implement long-term succession plans.

 

For accountants and other professional advisers, understanding the social care funding framework is becoming increasingly important. Early identification of potential liabilities, awareness of available funding routes, and collaboration with specialist legal and financial advisers can help clients navigate what is often one of the most significant financial challenges they will face later in life.