Inheritance Tax & Long Term Care Costs – Is Business Property Relief a Viable Solution?
When we cover our clients’ priorities every year, we discuss many subjects that are important to them or cause concern.
For many, who are secure and enjoying life in their 60s and above, thoughts increasingly turn to Inheritance Tax (IHT) and Long Term Care (LTC).
Often, a client will have had some experience of one if not both of these issues with their parents. It’s true to say that rarely are these experiences positive!
We also find that the two issues overlap in the thinking of many clients. For example, it’s common for elderly people to want to gift to children or grandchildren, yet at the same time worry about their ability to fund LTC for themselves if needed.
If they aim to gift large amounts to help with an IHT problem, then this can cause even more worry.
We also know that LTC & IHT are not going to go away, as HMRC are taking ever more each year in IHT receipts (£5.2b in 17/18) and Care Home funding is under immense pressure.
An article in the Guardian (1) recently talked about a study which found that approximately an additional 71,000 care home spaces will be required in the next eight years to cope with Britain’s soaring demand, with people living longer and facing more health problems.
The new research predicts there will be an additional 353,000 older people with complex needs by 2025, requiring tens of thousands more beds.
The findings from a team of academics at Newcastle University, published in the Lancet medical journal, revealed that many people over the age of 65 are now living longer but with substantial care needs.
The number of people needing round-the-clock help to feed and dress themselves is predicted to rise by 163,000. For adults over 65 the number of years spent with substantial care needs has doubled between 1991 and 2011.
The paper’s lead author, Prof Carol Jagger from Newcastle University, said: “The past 20 years have seen continued gains in life expectancy but not all of these years have been healthy.
This finding, along with increased number of older adults with higher rates of illness and disability, is contributing to the current social care crisis.”
Statistics show that 1 in 3 women and 1 in 5 men over the age of 65 need care of some sort, and even then the most basic of care homes can cost £3000 – £4000 per month with nursing home costs a lot more.
The average length of stay is 2 years, however we have a client who is nearly 100 and has been in her care home for 6 years!
Of course, when we create a strategy for clients we can look at the effect of any such costs will have on the security of their long term financial security.
This will take into account overall wealth and the ability to pay care home costs, for one or two people.
So, what we find is that the majority of our clients have the ability to pay these costs, but of course this means that they keep wealth aside to do so. This means these assets need to be taken into account for any inheritance tax calculation.
Increasingly we find that this is a common potential problem for the majority of retired doctors & dentists.
This has led us over the years to look at any solution that will take into account both issues, and interestingly an option is now available that aims to do exactly that.
Let’s look at Dr Smith who has seen his parents have happy and successful lives, but now in their late eighties are faced with care home costs for Mrs Smith senior.
They do not wish to sell their home, but have substantial cash savings of £100k & ISA investments worth £350k.
Looking at inheritance tax (IHT) their total estate is worth £1.35m, which is over the ‘nil rate bands’ (NRB) available to them of £900k. This consists of Personal NRB, and Residential NRB:
Personal NRBs as couple – £650k
RNRB – £250K
Total – £900k
This means that everything above £900k will be taxed at a 40% tax rate, which is a £180k tax hit for the family!
(The RNRB will increase to £350k from £250k in April 2020.)
With healthy pensions the Smiths can partly fund the care home costs from income, but expect to need to eat into capital at a rate of £3,000 per month.
However, they know that if they simply fund this from their existing cash & ISAs, they still have an IHT problem as they form part of their estate.
A possible answer for the Smiths is to use what is known as Business Property Relief rules, which state that if you invest in eligible investments, you are exempt from IHT after 2 years on those assets.
Assets can include:
- Shares in qualifying companies that are not listed on any stock exchange
- Shares in qualifying companies listed on the Alternative Investment Market (AIM)
Those who will potentially benefit include investors who:
- Don’t want to give away large sums of money
- Want to give the inheritance they plan to leave behind the chance to grow
- Want the money they invest to become inheritance tax exempt quickly
By quickly they mean 2 years, and there is even a scheme which can achieve this after a month or so at an increased cost for those under age 90.
So far so good with a possible IHT investment aiming to save as much as possible of the £180k tax hit.
But what about the ability to use these funds to pay any care costs?
So the option on these strategies is to choose the option whereby access to the funds is allowed for any reason including care costs.
Withdrawing funds has been possible in the past, but has been ad hoc, with the provider having to cash in assets to pay the investor.
Now such plans anticipate this and hold higher levels of cash to ensure timely payments can be made when required.
So the Smith’s strategy could be to invest say £350k into such an investment.
This would mean:
- They have £100k in cash they can draw on to pay care costs which will reduce their taxable estate
- This allows the BPR investment to grow outside their estate
- Each year that passes gives more RNRB for the couple
- Full access for care costs if needed
- Peace of mind for the Smiths
On any investment risk is a key area. Such investments need to be viewed as high risk, though over the last 12 years or so of their existence, the capital preservation schemes have done the job they said they would.
Please note – regarding the Residential Nil rate Band. BPR assets are included in any calculation of estate size, and if total assets exceed £2m, then the RNRB would be reduced.
Whether you are planning ahead for yourself or perhaps elderly parents, taking into account Inheritance Tax & Long Term Care could not only bring you peace of mind, but also save an awful lot of tax!
Please note this article just covers the basics and, as ever, please take professional advice.