Will new rules help cut your care costs?
The announcement of a £72,000 cap on social care costs in England brings some much-needed clarity to anyone trying to work out how they will fund their care in old age. But, with the cap only relating to one element of long-term care fees, and the cost to the state being met by a freeze in the inheritance tax (IHT) nil-rate band, covering these bills will still take some significant financial planning.
"The introduction of a cap is an important step forward in the government's agenda to reform social care, but there does need to be greater awareness about what the cap will cover and what it won't," says Chris Horlick, managing director of care at insurance firm Partnership. "I'd like to see a lot more clarity being introduced between now and April 2016 when the government is proposing to introduce the cap."
The cap only applies to the care element, with this determined by the rate the local authority would pay for care rather than the charge levied by the care home.
For example, based on figures from healthcare data firm Laing & Buisson, in the South East the local authority rate for residential care is £428 a week.
This rate is further reduced to remove living, or hotel, costs, which the Department of Health proposes should be set at around £12,000 a year, equivalent to £231 a week.
For someone living in the South East, this means that the element of care costs that would count towards the cap would be just £197 a week (£428 minus £231) regardless of whether they were paying £600 or £1,200 a week for their care. Setting this £197 against the £72,000 cap, it would take 365 weeks, or seven years and a week, before the cap was exhausted.
As a result, only a small number who do go into care homes will actually benefit from the cap. "The average length of time one of our customers spends in a care home is four years, although one in eight does live for eight years or longer," explains Horlick.
It's also important to note that, even if you do live long enough to reach the cap, providing you have sufficient assets not to qualify for additional financial support, you will still be paying a large part of your care costs yourself. For example, someone in a care home charging £600 a week would still need to pay £403 a week, while in a care home that charges £1,200 a week they would be expected to pay £1,003 a week.
In addition, to qualify for care costs to be offset against the cap, you need to meet the local authority's eligibility criteria that are based on your health. More details are still required but it could mean that, for some people in care homes, the £72,000 meter won't even start running.
There will potentially be more benefit for people requiring care in the proposed changes to the upper and lower threshold limits for means-testing. Under the current rules, you won't receive any help towards care-home fees if you have assets worth more than £23,250. Then, even if you hit this threshold, you will be expected to make a contribution to the costs until the value of your assets falls below £14,250 when the state steps in.
Under the government's proposals made in February 2013, the new limits will be £17,500 and £123,000, so more people will benefit from some state support.
Anyone with assets that fall between these two limits will be required to pay £1 a week towards the cost of their care for every £250 of assets in excess of the lower threshold they have. This would work out at a maximum of £422 a week.
The government has also announced it will no longer be necessary to sell your home to pay for care-home fees. Instead, through the deferred payment scheme that is being introduced in April 2015, the local authority will be able to put a charge against the property to cover the care costs plus a small amount of interest. This will become payable by the estate when the individual dies.
While the proposals on funding social care will mean more people will benefit from financial assistance, some of the revenue to cover these additional costs will come through IHT. Alongside its care proposals, the government also revealed that it intends to freeze the IHT nil-rate band at £325,000 until April 2018.
Already the amount of IHT collected is increasing. From a recent low of £2.3 billion in the 2009/10 tax year following the property crash, the annual tax grab has increased steadily to £2.8 billion in 2011/12.
"Property prices and stockmarket investments are beginning to increase again and, with the nil-rate band frozen, more people will have a potential liability," says Neil MacGillivray, head of technical support at James Hay Partnership. "But, though it's getting tougher, with time and careful planning, this is a tax you can avoid legally."
One of the easiest ways to reduce your potential liability is to give money away to loved ones, and there are plenty of annual exemptions to take advantage of - see the box below for more on annual exemptions.
You can also give away other assets that don't qualify as exemptions. But with these, it takes seven years before they're outside your estate for IHT purposes.
Rather than give these gifts outright, you can place them in trust. Although you still need to live a further seven years and there can be additional charges if you give away more than the nil-rate band over this period, this allows you to retain more control over who gets what and when.
Trusts can also be structured to give additional benefits. For instance, Higham says a discounted gift trust can be popular: "Part of the money you put into this type of trust will be immediately outside your estate for IHT purposes. How much will depend on your life expectancy, so the longer this is, the larger the amount that is outside your estate."
Care-home fees £ per resident per week
|CARE COSTS||ACCOMMODATION FEES||ANCILLARY COSTS*||OPERATOR'S PROFIT||TOTAL COSTS AND PROFIT|
|Residential care, frail elderly||£197||£151||£205||£44||£596|
|Nursing care, frail elderly||£347||£153||£205||£59||£764|
|Residential care, dementia||£221||£151||£205||£47||£623|
|Nursing care, dementia||£356||£153||£205||£60||£774|
Source: Laing & Buisson *Including food, maintenance, utilities etc
Nil-rate band planning
The IHT freeze is also likely to make nil-rate band planning fashionable again. With this, rather than using the transferable nil-rate band that would give the surviving spouse or civil partner a double nil-rate band when they die, each person makes provision in their will for assets up to the value of the nil-rate band either to go directly to someone else, for instance the children, or to go into trust for them until the surviving spouse dies.
Doing this would help to reduce the surviving spouse's estate if they were means-tested for care and, as Bob Perkins, technical manager at Origen Financial Services, explains, it can also be an effective way to reduce a future IHT bill. "When the nil-rate band increases, the transferable nil-rate band should take care of any growth in assets. But, if it's frozen, any growth will simply add to the value of your estate. By using nil-rate band planning, you can move this growth out, too."
This strategy can also be used for property, although couples must become tenants in common, rather than joint tenants. It's sensible to use a trust when dealing with property to ensure the surviving spouse is protected if one The IHT freeze is likely to make nil-rate band planning fashionable again of the beneficiaries is declared bankrupt or gets divorced. Without this, their part of the property would be regarded as part of their assets and they might have to sell it.
Be mindful of the rules funding long-term care costs during IHT planning. "A local authority will penalise you if it believes you have purposefully reduced your assets to avoid paying care costs," warns Perkins. "But, although there could be issues around last-minute planning, if you can show that the steps you took were to reduce your estate for IHT purposes, there shouldn't be a problem."
How much can I give away to reduce my IHT bill?
If you do have a potential liability, it's sensible to take full advantage of the exemptions. These include an annual exemption of £3,000; as many gifts of up to £250 to as many people as you like each year; and gifts in respect of weddings, for instance £5,000 if you're a parent of the bride or groom or £2,500 if you're a grandparent.
Another exemption that is often overlooked is regular gifts out of income. These can include birthday and Christmas presents or a regular monthly payment to someone, providing the gift doesn't affect your normal lifestyle.
"You do need to be careful to document the gift so it will be regarded as an exemption when you die," adds Matthew Higham, a financial adviser at Worldwide Financial Planning.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.