Plans to overhaul the funding of social care with the introduction of a single capital floor on savings and assets for care costs, set at £100,000, are vague and the Conservatives have provided any precise detail on how they will work, while contradicting the recently introduced inheritance tax nil-rate band, reports Sara White
Under the proposals, home owners will have to pay for their care costs, both in residential homes and if cared for at home, using all their assets, including the value of their house and savings until their estate is valued at £100,000. The money would be collected after death so the residential property would not have to be sold upfront as care payment costs would be deferred and likely held by the local authority as a charge on the property in line with the current system.
The care costs would be deducted from the estate after death, leaving a maximum protected £100,000 pot, assuming that care costs have used all the remaining assets. This would then be paid to the state in the same way as inheritance tax.
There is very little detail in the manifesto document so it is not clear whether the £100,000 floor will be an individual allowance or would take into account married couples and civil partnerships, perhaps treating them as two individuals, as currently happens with inheritance tax (IHT).
However, the current £23,250 limit is per individual and the general tax policy approach of recent governments has been to focus on individual taxation; in the same vein it would be logical for the £100,000 figure to be allocated per person.
Under the current system if a married couple, civil partner or a person over 60 lives with an older person who requires residential care, the other person can continue to live in the house and the property is not treated as part of the asset pot. It is therefore not included in calculations for care costs.
The new charges would effectively work as a tax on ill health, already being dubbed the dementia tax and seem to go in the face of the Conservatives’ commitment to a £1m inheritance tax threshold by 2020 for married couples and civil partnerships using the nil rate band when passing property to direct descendants.
The Institute for Fiscal Studies (IFS) estimates that 12-17% of people in their 70s are eligible for state support under current rules but would not be eligible under the new rules proposed by the Conservatives. In England in 2015–16, 783,000 adults were receiving local authority contributions towards the cost of long-term care – either in their own home or in a care home.
The current threshold for liability for nursing home care costs is £23,250 of savings and assets, per person. This includes the residential home, so effectively the proposals are more than four times the current means test threshold, but only in instances where the property is sole occupied.
Under the current system, care is free for those with savings below a £14,250 threshold and the residential property is excluded.
John Bunker, chair of the succession taxes sub-committee of the Chartered Institute of Taxation (CIOT) said: ‘There is a great deal of detail missing that we need.
‘The first thing is that the £100,000 is compared with the current £23,250, so yes, it is a higher number. So yes, the figure is larger. Now, the £23,250 is for each person, and assuming that it does not take into account any interest in trust, the £100,000 should be per person.
But bringing the value of the house into the equation, how would that work if more than one person lived in the house with you? Now the value of the house is disregarded. One has to assume that this would be same under these proposals.’
‘At the moment there is this concept that you can apply to the State if you are down to £23,250 to get support for care costs. But once you start getting state support, you cannot top up your own fees out of your own capital, but a partner or a trust can pay additional costs [for a nursing home] above what the local authority will pay.’
The Conservative manifesto states that the £100k floor ‘will ensure that, no matter how large the cost of care turns out to be, people will always retain at least £100,000 of their savings and assets, including value in the family home’.
An Age UK spokesperson told CCH Daily: ‘In the current system the home is disregarded if the husband or the wife needs to stay in the home and the other needs to go into a nursing home. If someone needs home care, in both circumstances it is the same [£23,250 savings limit].
‘This is like a triple whammy for older people if you’re unlucky enough to need care.’
Pensioners have also been hit with the removal of the triple lock on pensions, which means that after 2020 they will rise in line with either RPI or earnings, losing the 2.5% guarantee. Those on the state pension are currently paid around £7,000 a year.
The £100,000 floor marks a departure from the 2015 manifesto when the Conservatives suggested they would consider the Dilnot Commission proposals, which favoured setting an effective £75,000 cap on total care costs. This followed a 2010 review of social care costs instigated by the Coalition government.
Caroline Abrahams, charity director at Age UK said: ‘Sadly we don't think these measures will solve the crisis in social care, in fact in some respects they could make it worse. The proposal to raise the floor below which no one’s assets can fall from ca £23,500 to £100,000 is positive, but it is more than outweighed in our minds by the collective, negative impact of the other measures.
‘That's especially because the bringing in of housing to the domiciliary care means test will result in many more older people who are home owners and who need care having to fund it themselves. We worry that in this situation some older people will struggle to do that, especially those who are on their own, without any family to help them.
‘The financial difference this could make to them is also substantial. How much people pay for home care varies but you can certainly expect to pay £15 per hour. If you need care several times a day, every day, that very quickly adds up.
‘The older people most likely to be affected by this concern are “asset rich but income poor” - not uncommon, especially but not exclusively in the South.’
Lack of detail on £100k floor
The lack of detail leaves many unanswered questions about how the £100,000 floor will work, the long-term impact on property ownership levels, as well as concerns about the ongoing quality of care and risk of over-charging by care providers when the costs are effectively being paid by the government in the first instance and subsequently settled by the estate.
Some tax experts have indicated that the state would be able to take the value of the estate bar the £100,000 which would then have to cover probate fees and any subsequent charges, before making payments to inheritors. Estates at this level would not of course incur any inheritance tax.
Bunker said: ‘What is important is to keep your arrangements under review – not only early on, but also, and very importantly, as and when people may become unwell.
Bunker said: ‘One of the things that CIOT would say is that there is a question of whether this cuts across what [the government] was doing with the inheritance tax nil rate band because the idea was that this would go to direct descendants.’
There are a number of ways to hold property including property in possession trusts, but it is not possible to simply put a property in trust to avoid paying care costs. Bunker added: ‘At the moment there are restrictions about how you can put your property in trust if it is to pay for residential care costs.’
But there are ways for home owners to restructure their property ownership and put assets in trust for future generations, such as grandchildren, or use a possession in trust structure, so that the surviving partner is protected and can live in the property, without depleting the capital. The income from the trust is taxable, while the property remains within the trust.
Going forward, it will be extremely important to consider the succession of the estate while managing the care cost problem.
Under current inheritance tax (IHT) rules, there is the seven-year rule, whereby gifts are not counted towards the value of an estate after seven years. This assumes that the donor is alive seven years after gifting took place. If not, IHT is charged at 40% tax rate.
Details on the liability of property held in trust has not been addressed directly; under current rules it would be sheltered. This has not been confirmed and there is no detail in the manifesto, although it does more generally state that ‘we [Conservatives] will take a more proactive approach to transparency and misuse of trusts’.
If the Conservatives win the election, they plan to publish a green paper on the care proposals which will also address system-wide issues to improve the quality of care and reduce variation in practice.
Means test winter fuel allowance
For the first time, they also plan to means test winter fuel payments, although it is not clear if assets would be included in this threshold. There has long been criticism of wealthy pensioners receiving the payment, but the cost of implementing means testing has been a deterrent for removal of the universal benefit. This time the Conservatives claim it would save £1.5bn a year.
Plans to introduce means testing for the winter fuel allowance would be restricted to the ‘most vulnerable’ although there are no details about how this would be calculated. there have been suggestions that the existing pension credits system could be a basis for this, but this system is under-used as many people who are eligible for the benefits do not know about them or claim them. Age UK estimate that £3.4bn of pension credit and housing benefit was unclaimed by pensioners in 2014/15.
Age UK spokesperson told CCH Daily: ‘It is possible that they could use pension credit for means testing. It would be an easy way to identify vulnerable older people but we know that many people do not claim pension credit or are not aware of it.’
There are currently 1.9 million claimants of pension credit (2.2m including partners), but nearly two in five (38%) of pensioners do not claim the credit they are entitled to. Average pension credit is £42 per week.
It has committed to ‘maintain all other pension benefits’, including free bus passes, eye tests, prescriptions and TV licences, for the duration of this parliament.
There will be no changes to the attendance allowance and carer’s allowances.
The Conservative party did not respond to our requests for comment.
[NOTE: After a weekend of pressure, on 22 May Theresa May backed down slightly on the dementia tax manifesto pledge, while insisting that the Conservatives hadn't changed their principles for a social care plan, stating that 'there would be an absolute limit on what people will pay'.
By Sara White, editor, Accountancy