Deferred Payment Agreements: What They Are and What Can Go Wrong

When a person enters residential care and their main asset is their home, the question of how to fund the placement without an immediate forced sale is often the most pressing concern for the family. Deferred Payment Agreements ("DPAs") under sections 34 to 36 of the Care Act 2014 are designed to address exactly this problem. They allow a person to defer the cost of their care, secured by a legal charge on their property, so that the home does not need to be sold during their lifetime. In theory, it is a sensible and humane mechanism. In practice, entering into a DPA is riddled with potential pitfalls, particularly where the person lacks mental capacity to manage their own affairs.

What is a Deferred Payment Agreement?

A DPA is an agreement between a person (or someone acting on their behalf) and the local authority, under which the authority agrees to defer all or part of the care fees that the person would otherwise be required to pay as a self-funder. In return, the local authority takes a legal charge over the person's property as security for the deferred amount. The deferred fees, plus any interest and administrative charges, are then recovered when the property is eventually sold or from the person's estate after death.

The statutory framework is set out in sections 34 to 36 of the Care Act 2014 and the Care and Support (Deferred Payment) Regulations 2014 (SI 2014/2671). The detailed guidance on how local authorities should operate DPAs is in Chapter 9 (and Annexes B and C) of the Care and Support Statutory Guidance issued under section 78 of the Act.

Who qualifies for a DPA?

Under regulation 2 of the Deferred Payment Regulations, a local authority must offer a DPA to any person who meets all of the following conditions: they have been assessed as needing residential care; their capital, excluding the value of their home, is below the upper capital limit of £23,250; and they have a property that is taken into account in their financial assessment (i.e. one that is not subject to a mandatory disregard because a qualifying person still lives there).

In addition, local authorities have a discretion under section 34(3) to offer DPAs more widely. The Statutory Guidance encourages authorities to consider offering DPAs to people who have other assets they do not wish to sell immediately, or to those who have capital above the upper limit but whose savings will be exhausted over time.

The person must also have "adequate security" to offer. In most cases, this means a property on which the authority can take a first legal charge. If the property already has a mortgage or other charge against it, the DPA may not be available, or the authority may require additional security.

Interest and administrative charges

Local authorities are permitted to charge interest on the deferred amount. Under regulation 8, the maximum interest rate is the "relevant rate" published by the Office for Budget Responsibility in its Economic and Fiscal Outlook, plus 0.15%. In practice, this rate has fluctuated but has generally been between 1% and 3% in recent years. The interest is compounded, which means that over a long care placement the total amount owed can grow significantly beyond the raw care fees.

Authorities can also charge administrative fees to cover the costs of setting up and managing the DPA. These may include the cost of a property valuation, Land Registry fees, and legal costs for placing the charge. Chapter 9 of the Statutory Guidance states that these charges should be "reasonable" and should not be used to make a profit. In practice, some authorities charge upwards of £500 to £1,000 in setup fees, which are added to the deferred amount.

The equity limit

A person cannot defer an unlimited amount against their property. Under regulation 6, the authority must set a "sustainable equity limit" which determines the maximum that can be deferred. The Statutory Guidance at paragraph 9.62 states that the person should always retain at least £14,250 of equity in the property (matching the lower capital limit). This means that if the property is worth £200,000, the maximum deferral is £185,750 (less any existing charges on the property). Once the deferred amount reaches the equity limit, the DPA will stop and the person becomes responsible for funding their own care from that point, which may then require the sale of the property.

The 12-week property disregard and timing

When a person first moves permanently into residential care, their property is automatically disregarded for the first 12 weeks of the placement. During this period, the person should not be treated as a self-funder regardless of the value of their home. The DPA typically begins at the end of this 12-week disregard period, once the property starts to be counted as capital.

Local authorities should be proactive in offering a DPA before the 12-week period expires. The Statutory Guidance at paragraph 9.12 states that authorities should begin the DPA process as early as possible after the person enters care, to avoid a gap between the end of the 12-week disregard and the start of the DPA during which the person might be incorrectly charged as a self-funder. In practice, delays in processing DPA applications are common and can leave families facing unexpected demands for full fees.

Pitfall 1: Deputyship orders and authority to create a charge

This is where things frequently go wrong. Many people who enter residential care lack the mental capacity to enter into a DPA themselves. In those cases, someone else must act on their behalf. If a property and affairs deputy has been appointed by the Court of Protection under section 16 of the Mental Capacity Act 2005, it might seem straightforward for the deputy to sign the DPA.

However, a DPA requires the creation of a legal charge over the person's property. This is a significant act of disposition. A standard "general" deputyship order typically authorises the deputy to manage the person's property and financial affairs, but the scope of that authority is not unlimited. The Court of Protection practice direction and the standard form order do not automatically include authority to create charges over the person's property or to enter into transactions that materially reduce the value of the estate.

In some cases, a deputy may need to apply to the Court of Protection for specific authority under section 16(2)(a) of the MCA 2005 to enter into the DPA and consent to the legal charge. This application takes time and costs money (the court fee for a property and affairs application is currently £371). If the deputy proceeds without proper authority, the DPA may be voidable, the legal charge may be unenforceable, and the deputy could face personal liability for acting outside the scope of their appointment.

Before signing a DPA on behalf of a person who lacks capacity, a deputy should carefully review the terms of their deputyship order and, if there is any doubt about whether it authorises the creation of a charge, seek legal advice or apply to the Court of Protection for a specific order.

Pitfall 2: LPA attorneys and conflicts of interest

Where the person who lacks capacity has a Lasting Power of Attorney for property and financial affairs under section 9 of the MCA 2005, the attorney may be called upon to enter into the DPA on the person's behalf. Attorneys are subject to a duty to act in the donor's best interests under section 9(4)(a) of the MCA 2005 and must have regard to the principles in section 4 (the best interests checklist).

A serious problem arises where the attorney is also a beneficiary of the person's estate, which is extremely common. In most families, the children who are appointed as attorneys are also the people who stand to inherit the property. By entering into a DPA, the attorney consents to a legal charge being placed on the property, which will reduce the net value of the estate by the full amount of the deferred care fees plus interest. The attorney is, in effect, authorising a transaction that directly diminishes their own future inheritance.

This is a textbook conflict of interest. The attorney's personal financial interest (preserving the value of the estate they stand to inherit) conflicts with their duty to act in the donor's best interests (which may well include entering into a DPA so that the property does not need to be sold immediately and the donor can remain in a suitable care home).

The MCA 2005 Code of Practice at paragraphs 7.58 to 7.68 addresses conflicts of interest. Where a conflict exists, the attorney should ideally not make the decision at all, or should take independent legal advice to demonstrate that the decision was made in the donor's best interests and not influenced by the attorney's personal position. In practice, many attorneys sign DPAs without recognising or disclosing the conflict, which can create problems later, particularly if other family members challenge the arrangement.

Pitfall 3: Property held in trust

A DPA requires the local authority to take a legal charge over the person's property. This is only possible if the person is the legal owner of the property (or at least a beneficial owner whose interest can support a charge). Where the property is held in a trust, the position becomes significantly more complicated.

The most common scenario is where the property is held in a life interest trust created under the will of a deceased spouse. In a typical arrangement, the surviving spouse has the right to live in the property for their lifetime (the life interest), but does not own it outright. The legal title is held by the trustees, and the remainder interest passes to the beneficiaries (usually the children) on the life tenant's death.

In this situation, the local authority cannot place a charge on the trust property because the person needing care does not own it. They have a beneficial life interest, but that is not the same as legal ownership. The Statutory Guidance at paragraph 9.43 acknowledges that DPAs require the person to have a "legal or beneficial interest" in the property, but a life interest in trust property is unlikely to provide the "adequate security" that the authority needs.

This creates a significant problem. The person may have been living in the property for years and may have no other significant capital, but because the property is held in trust, a DPA is not available. The person must either fund their care from other resources, or the trustees may need to consider whether they can (and are willing to) make funds available from the trust. The interaction between trust law and the Care Act charging provisions is an area where specialist advice is essential.

A related issue arises where the property was transferred into a trust or a joint tenancy was severed specifically to protect it from care fees. This overlaps with the deprivation of assets provisions under section 70 of the Care Act 2014, and the local authority may argue that the transfer should be disregarded on the basis that it was made with the intention of avoiding care charges.

Pitfall 4: Jointly owned property

Where the property is jointly owned, the position depends on the type of co-ownership. If the property is held as joint tenants, the co-owner's consent is required for the creation of a charge, and the authority can only place a charge on the person's share. If the property is held as tenants in common, the person's share can support a charge independently, but the practical difficulties of enforcing a charge over a share in a property that is still occupied by the co-owner can be considerable.

In many cases where a spouse or partner still lives in the property, the mandatory property disregard applies and the property is not counted in the financial assessment at all, which means a DPA is unnecessary. But where the co-owner is someone other than a qualifying person under the disregard provisions (for example, an adult child who is not incapacitated and is under 60), the situation can become complicated.

What to do before entering into a DPA

If you or a family member are being asked to enter into a DPA, there are several things you should check before signing. First, confirm that the person offering to sign has the legal authority to do so. If they are a deputy, review the deputyship order carefully. If they are an attorney under an LPA, consider whether there is a conflict of interest and whether independent advice is needed. Second, check whether the property is held in trust or is subject to any existing charges. If the property is in a trust, a DPA may not be available. Third, understand the interest rate and administrative charges that will be applied. These can add significantly to the deferred amount over time. Fourth, ask the local authority for a written estimate of the equity limit and the projected duration of the DPA based on current care fees.

DPAs are a valuable mechanism for avoiding the immediate sale of a family home, but they are not without risk. Taking legal advice before entering into one can help ensure that the agreement is properly authorised, that conflicts of interest are addressed, and that the family understands the full financial implications of the arrangement.