When it comes to thinking about life savings and inheritance, most people automatically worry about the impact of inheritance tax, but did you know there is a far hungrier animal waiting to beat down your door and scoop up your hard earned cash; your local authority.
Yes the tax man could take up to 40% of yours, or your parents' estate but in reality this rarely happens. The Local Authority however has the ability to take everything. Think I’m kidding? Read on ......!
What is classed as my assets?
First I think it is important to highlight that when I say they have the ability to take your hard earned cash, I’m talking about your assets. Your assets include everything you own, from your cash, savings, investments and premium bonds to your property and other worldly possessions.
There may also be your pension pot and life insurance plans to take into account but as these will only be accessible after you die, they may only be affected by inheritance tax. (There is talk that with the introduction of the new pension rules due to come into force in April 2015, your pension pot could form part of your assessable assets but this has not yet been confirmed).
Why should I be concerned about my local authority?
Basically it all boils down to whether you or your parents will need any form of care as you get older, be it long term care, residential care, home help or more hands on nursing care. The money to pay for these services needs to come from somewhere and depending on your situation; it could well be funded by you.
Do I qualify for help with care home fees?
The average annual cost of long term care in England is around £28,500, rising to £37,500 if nursing care is required. Not a small amount of money by any stretch of the imagination, so it makes sense to look at the possible impact it would have on you and your family should you or your parents need any form of home care or residential care, so you can start to weigh up your options.
Here’s a guide on how the local authority determines whether you qualify for care funding in England (Scotland, Wales and Northern Ireland apply different rates):
• If the person requiring care is single with assets that exceed £23,250, they will have to pay for their own care, regardless of whether that is at home or in a residential or nursing home
• If the person requiring care is single and has assets of between £14,250 and £23,250, they will undergo an assessment of needs by the local authority. In this situation the care fees will usually be paid by the local authority, but in turn, they will take charge of any state pension payments the person receiving care normally gets, to help to pay for the care costs. The individual is then left with an allowance which is currently £22.60 per week. This can be reduced further depending on whether their assets exceed the lower limit £14,500 (the £22.60 allowance is reduced by £1 a week for every £250 worth of savings over the threshold of £14,250)
• If the person requiring care is single with assets below £14,250, they will again be assessed by the local authority but usually in this case their care costs are fully funded. As before, any state pension payments will be taken leaving the individual with a weekly allowance. (currently £22.60).
So in a nutshell, if your assets are greater than £23,250 you could be required to pay 100% of the costs.
What are my Long Term Care Payment Options?
Only a few people are able to afford the costs of long term care with money readily available from their own incomes and investments, but clearly this is the first option to look at, along with any financial help the family will provide. You may wish to consult with a specialist financial adviser to help you with this.
If you or your parents own your own property, you could look to rent it out in order to provide an income that will pay, or partially pay your care fees, but rent of course could fluctuate depending on the reliability of your tenants and the housing rental market.
You could release equity from your property with an equity release mortgage that will either provide you with a lump sum to invest or a regular income. Again you should seek specialist equity release advice.
If none of these options will provide sufficient income to pay for your care home fees, then along with approximately 70,000 other home owners in the country who have gone into long term care, the sad truth is that the property will have to be sold.
Can I avoid selling my home to pay for long term care fees?
There are a set of rules that will exclude your property from being assessed by the local authority based on whether any of the following people live there:
- A spouse or partner
- An incapacitated relative
- A relative over the age of 60
- A child under the age of 16
If none of these apply, your property will be included in the assessment.
There is no guarantee that your property can be protected from local authority assessment, but there are legal schemes out there that could help mitigate your liability.
You could transfer the ownership of your property into a lifetime trust, with you as the beneficiary. This could be a way of protecting your home from the assessment providing it is done at a stage before it is conceivable that help from a care home is required.
There are no hard and fast rules about how long the trust would need to be in force before care home services are required, so be wary of any companies making guarantees.
A word of warning. If you are seen to be deliberately removing your property or other assets from the assessment, for example transferring ownership to your children, this will be disallowed and therefore will still be included in the calculation.
So what about Inheritance Tax?
When you die your assets are totalled and if they are higher than £325,000, Inheritance tax charged at 40% will be applied to any amount that exceeds this threshold.
If you are married, your assets will pass to your spouse (see ‘Is it worth making a Will’ below) along with your £325,000 allowance. Therefore they will have a total inheritance tax free allowance of £650,000 when they die.
Can I avoid paying Inheritance Tax?
For most, the above scenario will mean that you will not pay Inheritance tax.
If your situation takes you over these limits, then there are a number of ways you can reduce or mitigate your tax bill.
Taking out a whole of life insurance plan could produce a cash sum that will pay your tax bill and setting up a trust could protect some of your assets from being included as part of your taxable estate.
Whilst you will find a lot of information online, if you think you may be subject to inheritance tax, it is sensible to seek specialist financial advice.
Is it worth making a Will?
The primary purpose of making a Will is to ensure your assets go to the people you choose. Don’t naturally assume that if you are married, everything will automatically go to your better half as this isn’t always the case.
If you don’t make a Will, the state will decide what happens to your assets according to the rules of intestacy. These intestacy rules are fairly antiquated and certainly don’t take into account the more complex lives we live these days, so having a legal Will in place really is the safest option.
If you are married, it is worth considering a Mirror Will, which is a joint Will that will cover you both, even when one of you has died. For more information on this and other types of Will, visit Making a Will.
So what will the future hold?
As you can see, unless you are one of the 4% who fall into the inheritance tax bracket, the tax man really isn’t the scary monster when it comes to taking your hard earned cash; it’s the local authority.
Things do look set to change in 2016 when the Government’s new care bill comes into fruition, introducing what is supposed to be a cap on the cost of care however reports state that the reality of the proposals will only protect a small proportion of the population so watch this space.
The bottom line is it all depends on what the future holds for you and your family’s health and care requirements. Unfortunately its crystal ball time again as who knows what the future will bring.
The main thing is that you are thinking about things now so you can start to put plans in place and seek professional help if your situation requires that bit of extra help. As they say, forewarned is forearmed.