Social care plans to create a ‘two tier’ system & pave the way for IHT changes – get ready | Personal Finance | Finance
Social care reform has been laid out by Boris Johnson, with National Insurance rises to be introduced from April 2022. The Government announced employees, employers and the self-employed will all pay 1.25 percent more NI from next year in a bid to reduce NHS backlogs and deal with a costly social care crisis. Mike Stimpson, a Partner at Saltus, commented on the reforms and warned they could “pave the way” for inheritance tax (IHT) changes.
Mr Stimpson detailed while the proposals do address the issue of the young paying for the elderly, they will disproportionately impact lower earners and do not take into account the fact older people have been paying NI contributions their whole lives. Addressing the care home cost cap, he warned it could result in a change to IHT rules and inadvertently create a two tier care home system.
“Creating a separate tax from NI does attempt to address the issue of the young paying for elderly care, as it can still be levied on pensioners,” he said.
“However, it is important to note that many pensioners may feel that they have paid full NI receipts already in the expectation that care from the state would now be provided, so it is certainly not a clean solution.
“It does also appear to be disproportionately impactful for lower earners as they will be paying proportionately the same but the effect on their standard of living will be much greater.”
“The cap on care home fees will again benefit higher earners and those with greater wealth because, where previously, significant costs could well have been settled by private wealth they will now be covered by the state. This could mean that people who go into care may be able to pass on more of their wealth to family. It raises the question as to whether this paves the way for the Government to amend IHT rules further and certainly shines a spotlight on the importance of effective IHT planning.
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“I think there also needs to be more clarification on how the cap will be administered, tracked and recorded, and if people will still have the option to continue to pay privately, either partly or fully. Because it is quite likely that private – and more expensive care homes – will not be funded by the Government cap, which could create a two tier system, or possibly create a situation where people are moving care homes once the Government starts paying the bill.”
IHT itself is becoming an increasingly important source of revenue for the Government. In late August, HMRC data showed the state collected £2.1billion from IHT from April to July 2021.
This was an increase of £500million when compared to the same period a year earlier. Overall, IHT is adding more and more to the Government’s coffers.
As such, Nick Ritchie, a Director of Wealth Planning at RBC Wealth Management, noted a reduction in IHT rates is unlikely, but other areas of the tax could be targeted for reform.
Speaking with Express.co.uk, Mr Ritchie said: “The £0.5billion year-on-year increase in IHT receipts comes as no surprise.
“Rising house prices and investment markets have increased the volume and value of estates caught in the IHT net, and with the Chancellor freezing the nil rate band until 2026, this trend looks set to continue.
“At the same time however, many individuals have brought forward their plans to gift to the next generation amid mortality fears fuelled by the pandemic, and concerns over how the Chancellor might target larger estates in the future.”
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Mr Ritchie covered what changes could be on the horizon: “One thing is for certain, at just 0.6 percent of the 19/20 tax take and with an IHT rate of 40 percent, already among the highest of the OECD countries, targeting IHT won’t be the silver bullet to recouping the swelling deficit.
“Increasing the rate of IHT seems unlikely, but enhancing receipts by removing or reducing reliefs, targeting lifetime gifts or removing the generous capital gain exemption on death, could have a part to play.
“Individuals might wish to consider implementing their wealth transfer strategy sooner amid current, tried and tested rules, rather than risk being caught out by stricter rules in the future.”
Money Helper, the public advisory service, expanded on how gift, reliefs and exemptions work in practice: “Some gifts and property are exempt from Inheritance Tax, such as some wedding gifts and charitable donations.
“Relief might also be available on certain types of property, such as farms and business assets. If the person who died gave a gift in the seven years before they died, it’s counted as part of the estate, and likely to incur IHT.
“How much tax is due depends on the value of the gift, when it was given and to whom.”
While it is possible to reduce how much IHT is paid, it is a complicated area to manage and often requires professional guidance.
However, reductions can be achieved by utilising the following:
- Leaving a legacy to charity
- Putting assets into a trust for heirs
- Leaving an estate to your spouse or civil partner
- Paying into a pension instead of a savings account
- Regularly giving away up to £3,000 a year in gifts.
Leaving money to charities in Wills (known as leaving a legacy) is a popular option for British families. According to analysis from Hargreaves Lansdown, 10,000 charities are named in Wills annually.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, reiterated how beneficial this could be.
“Legacies are a lifeline for charities, and by leaving money in your will, you won’t just get a warm glow from helping a good cause, you’ll also get a boost from knowing you could cut your inheritance tax bill too,” she said.
“There are just certain steps you need to take to avoid the pitfalls of legacy giving.
“The pandemic dealt a triple blow: charities needed to help more people, they were able to raise less cash through events and charity shops, and delays in probate meant less legacy income. Since the beginning of this year, legacy income is thought to have recovered. Tragically, this is partly because more people have passed away, but also because long delays in the probate process have started to unwind.
“Legacy giving isn’t just essential for charities, it can work in your favour too. It falls out of your estate for inheritance tax purposes, so you can reduce the part of your estate that’s potentially liable for tax. If you leave at least 10 percent of your estate to charity (after exemptions), the rate of inheritance tax payable on any part of your estate outside your allowances falls from 40 percent to 36 percent. This won’t save money overall, but will ensure a charity you care about gets the money rather than the taxman.
“However, leaving money to charity needs to be thought through carefully – and added to your will in the right way – or you could end up leaving far more or less than you expected to.”
Ms Coles concluded by highlighting the pitfalls people should look out for if they’re leaving money to charity:
- “If you leave a fixed sum, your circumstances could change, so it makes up a much more or less significant part of your estate when you die. So, for example, you might have an estate of £200,000 and write a will leaving £10,000 to charity (five percent). Then you go into a care home, and spend £150,000 of your estate. Suddenly you’re leaving 20 percent of your estate to charity. One way to deal with this is to lay out specific bequests to family and leave the remainder to charity. Alternatively, you can specify a specific percentage of your estate goes to the charity.
- “If you leave the remainder or a percentage of the estate, house prices will make a major difference to your legacy. Recent house price hikes could come as brilliant news for those who want to do as much as possible for charities, but if they leave you giving more than you intended, it may be worth revisiting your will.
- “If you leave money to charity without letting your family know, they may be expecting more of a legacy than they eventually receive. It could cause even more distress at an incredibly difficult time, so it’s worth talking to your family well in advance so they know where they stand.
- “If you name the charity in your will, it will be published, and the charity may start chasing for the money, which can be distressing for whoever is dealing with probate. You can mention in the will that there’s a charitable gift, and then name the charity in a letter of wishes alongside the will – so the name of the charity isn’t in the public domain.
- “If you choose to leave a significant proportion of your money to a charity rather than to family, they could challenge the will. They might argue that you didn’t know what you were doing, or you were under undue influence. It can help if you have left a detailed explanation of your decision in the letter of wishes. It’s also useful to write a letter to the charity that it can keep on file. If there’s likely to be any question over your mental capacity, you may want to get a doctor’s letter, written to your solicitor, stating you are able to understand and make decisions about your will.”