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Long Term Care & IHT: what are the options?


Long term care is not often a subject that most people will consider.

That is, until the point when either you or a loved one are in need. As advances in medicine and improved living standards leads to increased life expectancy, more of us will find ourselves requiring some form of care in later life. With the cost of nursing care continuing to spiral upwards every year, the need to plan for the future is more important than ever.

With this in mind, Inheritance Tax (IHT) can have a significant impact on the future wealth that is available to be passed on to your beneficiaries. Without any IHT planning 40p in every £1 of your estate could be due in tax after your nil rate band has been deducted.

This article seeks to identify the options available for the funding of care costs – either in your own home or in a residential care home – while helping to preserve your wealth for future generations.

The content of this article should not be taken as advice as your own circumstances may be different. All calculations and rates are based on current legislation as at December 2015 and subject to change. Please contact us to arrange a meeting regarding your own personal financial affairs.

1. Long Term Care

1.1 Care at home costs

Care at home can be by far the most cost efficient way of paying for assistance, but varies greatly according to the care recipient’s needs and the number of hours' of assistance required.

Should the need arise, an individual could require an additional £25,000 to £45,000 income for care costs over and above their current level of income. Funds may also be required for modifications to the home, such as adapting the bathroom, installing a lift or widening doors and installing ramps to accommodate a wheelchair.

In order to claim any assistance towards these costs, the local authority will need to prepare a support or care plan and then undertake a financial assessment of the individual’s means. The ability to pay will be determined by income, expenditure and savings and doesn’t include the value of any property.

1.2 Nursing home means testing

If the value of your assets are calculated to be greater than £23,250 (£118,000 after April 2020) an individual will be expected to pay privately for their own care home fees. Any prior large gifts could fall foul of the ‘deprivation of assets’ test and be added back into the means test calculation if they are felt to be deliberately made to avoid care costs.

1.3 Cap on Care Costs

Nothing is set in stone, but at the moment in April 2020:

  • There will be a lifetime cap on total cost of care that an adult has to pay of £72,000.

  • This cost excludes ‘daily living costs’ such as rent, food and utilities.

  • It was announced that £12,000 pa of care home fees in 2016/17 would be treated as ‘daily living costs’, however whether this figure will change by 2020 is yet to be seen.

  • Furthermore, this cap only includes the maximum a local authority would be prepared to pay for the care, rather than the actual cost.

1.4 Post April 2020 Example

If we assume that nursing home care costs are £60,000 pa and the ‘daily living cost’ is £12,000 pa, this means that the difference of £48,000 (£4,000 pm) could be classed as the total cost of care.

After 18 months (£4,000 x 18 = £72,000) the care costs charged would equal the £72,000 lifetime cap. At this point the local authority would step in and pay for the annual shortfall of £48,000 but not the daily living cost totalling £12,000 pa.

However, if the local authority believes the maximum care cost should only be £36,000 (£3,000 pm) and not £48,000, they would only start to pay the care costs after 2 years (£3,000 x 24 =£72,000).

2. Inheritance Tax

An estate is exempt from Inheritance Tax (IHT) if the deceased left everything to their husband, wife or civil partner, who lives permanently in the UK.

Married couples and civil partners can give any value of gifts to each other during their lifetime without IHT being due on them. This is known as ‘spouse or civil partner exemption’.

2.1 Nil Rate Band (NRB)

The NRB is the value of the estate on death that is not subject to IHT and currently stands at £325,000. The NRB will be frozen at this level until April 2021. The surviving partner is allowed to use the un-used portion of the NRB of their spouse or civil partner from their prior death. This could double the tax-free allowance to a maximum of £650,000.

2.2 Main Residence NRB

A new tax-free ‘Main Residence Nil Rate Band’ will be introduced from 2017 in addition to the standard NRB. It is being phased in gradually starting at £100,000 from April 2017, rising by £25,000 each year until it reaches £175,000 in 2020. In order to qualify for the additional main residence NRB, the main residence must be passed on death to direct descendants. Direct descendants are a child of the deceased and their lineal descendants.

Like the NRB, the Main Residence NRB will be transferrable between spouses on death.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional NRB will be tapered away by £1 for every £2 that the net value exceeds that amount.

The Main Residence NRB will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional NRB, are passed on death to direct descendants.

The freezing of the main NRB will increase the importance of IHT planning as more families are drawn into the IHT net through wealth inflation (leaving residences aside).

The main residence NRB will enable the Chancellor to claim that a £1 million NRB has been achieved and will undoubtedly take some families out of the IHT net. However house price inflation may mean that the benefits of this additional NRB will be gradually eroded.

2.3 Main options usually considered to reduce IHT:

1. Take out a life policy in trust with a sum assured equal to the liability.This is an expensive option and unrealistic in practice.

2. Make gifts - Annual £3,000, multiples of £250 to individuals and gifts from ‘excess income’ are exempt from IHT. Other gifts would need to have been made for 7 years to fall outside of the estate for IHT.

3. Invest into an offshore bond - this offers 5% tax deferred withdrawals and a ‘gross roll up’ of investment returns. Segments of the bond can be assigned to beneficiaries at a later date to surrender at their tax marginal rates. The bond is potentially not taken into consideration under the means testing calculation for care costs (depends on the approach taken by the local authority). The bond can be held in one of the following:

3a) Loan Trust - provides maximum flexibility, access to capital and income via bond withdrawals. Any growth accumulates outside of the estate and if 5% withdrawals taken and spent/gifted also reduces IHT liability, although gifts would be PETs if over £3,000 per annum as bond withdrawals are not classed as ‘income’ but return of capital.

3b) Discounted Gift Trust - access to income but not capital. Capital outside of estate after 7 years and an initial discount off the IHT bill given at outset based on age, health and future return of capital by way of the income. Downside is that income level cannot be changed from that selected at the start.

3c) Discretionary Trust - no access to capital and income, but can retain control of the investment of monies and start the seven year timeframe for the gift to be outside of the estate for IHT. Segments of the bond could be assigned to beneficiaries and surrendered at a later date at their marginal tax rates.The assignment of segments could be gifts or loans to help with the beneficiary’s own IHT liability on death or to protect from any potential future marital issues.

4. Inheritance Tax Schemes qualifying for Business Property Relief (BPR). Access to capital retained along with the ability to take an income – useful for future care costs. The investment will fall outside of the estate for inheritance tax purposes after only 2 years.

The bond (Option 3) offers a simple tax regime without the need for the trustees to carry out annual tax returns and therefore an accountant would not be needed for this element of her affairs.

The following table compares the IHT saving on an individual’s estate should they gift £250,000 to family now or invest the same amount into an Inheritance tax scheme (4) qualifying for business property relief:

A PET forms the first part of an individual’s estate before applying the nil rate band, the table above assumes that the total PET value is less than the nil rate band so no taper relief is available. Note. By taking advantage of the BPR legislation we have recently been able to achieve an IHT saving of £200,000 in respect of a 90 year old client who passed away in April 2014.

The content of this article should not be taken as advice as your own circumstances may be different. All calculations and rates are based on current legislation as at December 2015 and subject to change. Please contact us to arrange a meeting regarding your own personal financial affairs.

#IHT #LongTermCare #TaxPlanning #tax #retirement #Investment #BusinessPropertyRelief

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