The 7 year rule applies if you give away some of your estate. It means that if you die within seven years of giving the gift, the recipient may have to pay Inheritance Tax on it. It is a myth that the 7 year rule also applies if you want to give away money in order to qualify for Local Authority funding for care fees. Giving money away to avoid care home fees can be considered deliberate deprivation of assets, which comes with consequences.
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At a glance
- It is a myth: The widely held belief that a 7-year time limit protects gifted money or property from being counted toward care home fees is wrong.
- Where the rule applies: The 7-year rule strictly relates to Inheritance Tax (IHT) for gifts made before death and carries legal weight in social care funding assessments.
- Deprivation of assets has no time limit: Local authorities can investigate past financial transfers or property sign-overs regardless of how many years ago they occurred if they suspect avoidance of care costs.
- Consequences: If a council determines that an asset was given away to qualify for state-funded care, they can treat you as though you still own it, leaving you with less resources to self-fund.
What is the 7 year rule?
The 7 year rule is to do with Inheritance Tax. It means that if you give a sum of money, property or other assets that are worth over £3000 to somebody as a gift, it will be part of your taxable estate for seven years. If you die within seven years of giving it, the person you gave it to may have to pay Inheritance Tax on it.
Please note that spouses are not subject to Inheritance Tax.
How care funding works
When you start looking into moving into a care home or receiving home care, you will have a financial means test.
This is when the Local Authority checks how much wealth you have in capital and assets.
If you have below a certain amount, you will qualify for Local Authority funding (state-funding). If you have above this threshold, you will have to fund your care yourself (self-funding).
What is deprivation of capital for care home fees?
Deprivation of capital, or deprivation of assets, is when you deliberately reduce your wealth in order to qualify for funding. You might do this by giving it away to a loved one, charity or by putting it in a trust.
It’s a bit more complex when it comes to putting assets in a trust. Sometimes using a trust, such as a Life Interest Trust, will mean it’s exempt from the financial means test. Sometimes, however, Local Authorities will see it as a deprivation of assets.
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Does the 7 year rule apply to care fees?
Some people believe that if they give away a chunk of their capital and assets, such as to a close family member or friend, they can take their wealth below the funding threshold and qualify for state-funding. They believe that as long as they give the money away at least seven years before they need care then the LA won’t count it in their financial means test.
This is not true and is a very risky strategy. The 7 year rule does not apply to care fees and may be considered a deliberate deprivation of assets. The Local Authority may still count the money you gave away, no matter how long ago you gifted it. This could mean that not only do you not qualify for funding, but you don’t have a lot of money left to self-fund your care.
According to Martin Searle Solictors, “It is likely that this misconception comes from the law around inheritance tax gifting, which does have a “seven year rule”. The laws around inheritance tax and paying for care are very different and should not be confused.”
Will any gift I’ve given be a deprivation of assets?
This is not to say that you can’t gift assets ever. It just means that you can’t do it for the purpose of avoiding care home fees. The Local Authority look carefully at your intention when giving that money away.
For example, if you gave your daughter £20,000 ten years ago for a downpayment on a house, and they can see she bought a house with it soon afterwards, then they would likely not consider it a deliberate deprivation of assets. They also look at whether you expected to need care at the time, or had a care needs assessment.
Can I put my house in my children’s name to avoid care home fees?
Property is more complicated when it comes to care funding.
Your property won’t be included in the financial means test if you’re going to stay living there. It also won’t be included if your partner still lives there.
If you are moving to a care home and no partner or close relative under 60 will remain living there, it will be part of your estate in your financial means test.
Putting the house in your child’s name or anybody else’s could be considered deliberate deprivation of assets. It depends on when and why you did it.
Next steps
- Seek financial advice: Talk to a financial advisor who focuses on planning for later life before giving away assets or property, and make sure you know how local authorities check your money and property.
- Keep clear records: Keep detailed papers showing that any past gifts or financial help were given for normal reasons (like helping a child buy a house) and not to avoid future care costs.
- Request a care needs assessment: Get in touch with your local authority to find out your current financial limits and if you qualify for state help before making big decisions about your home or savings.
FAQs
Is the 7 year rule a myth?
Yes and no. The 7 year rule is very true for inheritance tax, meaning any gift you make within 7 years of your death can be taxed. However it is not true for deprivation of assets – a gift you make at any time may be considered a deprivation of assets when local authorities decide whether to fund your care.
What is the 7 year rule for care home fees?
Many people believe that there is a 7 year rule when it comes to transferring assets; that if you give away money or property at least 7 years before you move into a care home, then it won’t be taken into consideration, but this isn’t true.
Does the 7 year rule apply to care home fees?
The seven year rule is a myth. There is no time limit to deprivation of assets, meaning any past disposal of assets could be considered. However, the local authority must provide evidence of motive and consider if the amount made any substantial difference to the capital limit, e.g. £23,250 in England.