Middle-class and wealthy Brits' assets will help foot the nation's growing care bill through bumped-up inheritance tax (IHT), the government has decided. The move is a fresh blow to individuals living in England* who have saved and invested to build up significant levels of wealth, and is the latest in a string of moves by Prime Minister David Cameron that will make them significantly worse off.
*Residents of Wales and Scotland are subject to different rules.
Every year around 30,000 elderly Brits are forced to sell their homes to cover the costs of the care they require. But new reforms welcomed last week were brought in to help put a stop to this. There are three main aspects to this solution you need to know about. The first is a rise in the means-tested threshold of savings and assets from £23,000 to £123,000 from 2017. The second is that anyone with assets below this amount will not spend more than £75,000 on care, thanks to a new cap proposed by Health Secretary Jeremy Hunt. The £75,000 cap refers to personal care, such as help with washing and dressing, not board and lodgings, which is not capped, or care provided by a registered nurse, which is free.
And finally, to help cover the excess care costs of the 34.7 per cent of British households that own less than £123,000 in assets, the IHT threshold will be frozen at £325,000 until 2019. This is a U-turn on the Autumn statement 2012 in which George Osborne announced that the inheritance tax threshold would rise from £325,000 now to £329,000 in 2015-16. It represents an immediate £12,000 loss for the beneficiaries of estates worth more than the threshold. And it is not the first policy climbdown to ensure a greater number of British savers have to pay inheritance tax.
In his 2010 Conservative manifesto, David Cameron pledged to raise the inheritance tax threshold to £1m for individuals, saying: "We will raise the IHT threshold to £1m to help millions of people who aspire to pass something on to their children, paid for by a simple flat-rate levy on all non-domiciled individuals." Three years on and the reality is exactly the opposite. The estate of an individual with £1m in assets has to pay £270,000 in IHT - more than the average amount that individual would have needed to foot the entirety of their own care bill.
David Smith, a financial planner at Bestinvest, says: "Inheritance tax was originally aimed at those with very substantial wealth, but has progressively drawn in more and more people thanks to rising property prices, particularly in London and the south-east, so IHT is going to be a problem for many people who are unlikely to regard themselves as wealthy at all."
Luckily there are a number of ways you can reduce the amount of IHT you have to pay - all it takes is a little financial planning. If you want to learn more about how you can do this, read our article on inheritance tax-free share ideas or Inheritance tax the bigger picture.
How much does care cost?
The fact that one in three of us will spend our final years in a residential care home is a difficult reality many of us don't want to face. But at least if you're safe in the knowledge that you've saved enough to cover the costs, you won't have to go through the stress of performing an emergency dissection of your finances if the time comes. Unfortunately, unless you have a crystal ball you can't know exactly how much you're going to need to pay for your own care needs, but some consideration of the average costs will help give you a sensible idea as to what you might need.
The majority of people have no realistic idea of how much care costs, which makes proper financial planning impossible. Research from care annuity provider Partnership found two-thirds (65 per cent) of adults think care home fees are less than £30,000 per year, a third think they won't exceed £20,000 and 12 per cent are under the impression they are less than £10,000.
But care home fees are actually on the rise and will set you back around £30,000 per year, on average, with rooms in nursing residences located in London and some areas in the south-east well in excess of £40,000 a year. The average duration someone will spend in a care home is 800 days (around two-and-a-half years), according to Bupa, but up to a quarter of people will need care for as long as a decade.
Not included within the government's recently announced £75,000 cap, are the 'board and lodging' costs that you will incur while in a care home, and these can be as much as £15,000 per year, so you need to budget for several years' worth of these expenses too.
How can I make sure I've got enough to cover my care needs?
The best way to ensure you have sufficient funds is to leave yourself plenty of time. There used to be a number of insurance products you could buy while in your 50s and 60s to protect against huge care bills in later years, but after the market dwindled (only 3,000 policies were sold) in 2004, providers pulled out of the market, so these policies are no longer available.
But if you want to eliminate the risk of depleting your estate if you require care for longer than expected, you could consider an immediate-needs annuity. Like a regular annuity it gives you the security of a guaranteed income for the rest of your life - but it pays your money straight to the care home, eliminating the tax you would have otherwise had to have paid on it. These are bought just before you have to go into a care home, and rates vary greatly depending on your age and health, which will be assessed by the provider. The average age people buy an immediate-needs annuity is 87, and Brian Fisher, long-term care marketing manager at Friends Life, said the average lump sum needed is £100,000.
IHT payable by a married couple if the threshold had been raised to £1m compared to now:
Average weekly care home fees around the UK 2011-12
Premium for an immediate needs annuity worth £30,000 per year
|Age||Premium for £30,000 p.a. escalating at 5% p.a.|
Source: Partnership, February 2013. (The illustrations assume the client has high blood pressure, has recently had a stroke, requires assistance with ADLs (Activities of Daily Living), is not bedridden and is on 3 prescription medications.
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