Under Government proposals, unused defined contribution pension funds are expected to become subject to inheritance tax from April 2027. Here’s all you need to know, as explained by Lisa Morgan at nursing care recovery team Hugh James
The move to see unused defined contribution pension funds to become subject to inheritance tax 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. However, many families are making hasty decisions without properly considering how they would pay for care later in life. With residential care fees now regularly exceeding £8,000 a month, running out of money can have serious consequences.
Moreover, councils are becoming far more aggressive in investigating whether people have deliberately given away assets to avoid paying for care. This is known as ‘deprivation of assets’, and it can leave families facing unexpected financial problems years later.
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.
Why The Pension Changes Matter
The planned 2027 pension tax reforms are changing behaviour because pensions have historically been viewed as one of the most tax-efficient ways to pass wealth to the next generation. But decisions driven purely by inheritance tax concerns can create major risks later.
Someone in good health today may still need residential or nursing care in the future, particularly as people are living longer. If substantial assets have already been transferred away, the person may struggle to fund their care privately — while also facing questions from local authorities about whether the gifts were intended to reduce assets below funding thresholds.
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.
What Funding Options Are Available?
In England, for those who cannot fund their care privately, they will qualify for local authority support if their assets fall below £23,250. In certain cases, individuals with substantial healthcare needs may qualify for NHS Continuing Healthcare (CHC) funding, which is not means-tested. CHC is fully funded by the NHS and can cover the entire cost of care, including care home fees.
Where successful, NHS Continuing Healthcare can protect individuals from exhausting their savings on care fees and may significantly reduce pressure on family finances.
A Careful Balance is Needed
The upcoming inheritance tax changes are understandably causing anxiety for many families. However, rushing to give away wealth without considering future care costs could prove to be a costly mistake. With councils facing mounting financial pressures, scrutiny of historic gifting is only likely to increase. The safest approach is balanced planning, reducing inheritance tax exposure where appropriate, while still ensuring enough money remains available to provide security and dignity later in life. hughjames.com
