As you'll be aware, the government plans to introduce a new £86,000 cap on the amount anyone in England will have to spend on personal care over their lifetime. The cap will apply irrespective of a person’s age or income. This cap has been set as roughly equivalent to the cost of three years of care.
Only money spent on meeting personal care needs count towards the cap. Spending on daily living costs (often referred to as ‘hotel costs’) in a care home will not count towards the cap.
If an individual has assets worth less than £20,000 the local authority will meet all care costs.
If the individual has assets between £20,000 and £100,000 he/she will have to contribute to care costs, but will also be eligible for means tested support covering some of those costs.
These limits will apply from October 2023. They substantially increase the current limits where all care costs are met where assets are less than £14,250 but support is not provided where assets exceed £23,250.
These proposals broadly follow suggestions made by Sir Andrew Dilnot in his 2011 report ‘The Dilnot Commission Report On Social Care’.
The Centre for Health and the Public Interest (CHPI) - an independent non-party think tank, commenting on the original Dilnot proposals, said that the proposed cap (then £72,000) had the effect of “... protecting the inheritance of those whose parents had built up significant amounts of housing wealth but had been unfortunate enough to have needed care in old age.”
How are the costs to be funded?
From April 2022, there will be a temporary 1.25% increase to National Insurance Contributions (NICs). From April 2023 onwards, the NIC rates will revert to 2021-22 levels.
6 April 2023 will see the introduction of a 1.25% Health and Social Care Levy. Those over the state pension age will also be included in paying this levy which will apply to income currently subject to NIC - employment income and income from self-employment.
All rates of UK dividend tax will increase by 1.25% from April 2022. These tax changes will apply UK wide.
The proposed reforms will apply only in England. However, it is expected that Scotland, Wales and Northern Ireland will develop a similar approach to supporting care costs.
The Charging for Residential Accommodation Guide (CRAG) provides local authorities with guidance on means testing. It has been claimed that CRAG has not always been applied uniformly and this has caused confusion and distress. Perhaps there is an opportunity to revisit it with a view to eliminating inconsistencies and clarifying ‘grey areas’.
The government proposals mention that insurance companies will be encouraged to implement new products to help finance future social care costs.
How will this impact financial planners?
Many advisory firms will have an investable assets requirement well in excess of £100,000 so most, if not all, clients will not qualify for local authority support. However, clients will need advice in building up a fund of at least £86,000 to meet the proposed contribution cap.
The client will still need to meet ‘hotel costs’ from his or her own resources and a plan for funding these will need to be developed. It is probable that pensions and ISAs will form the major elements in such plans while in many situations, investment bonds will have a place.
Clients should be encouraged to review their wills and ensure appropriate powers of attorney are in place. Does the client want to make an ‘advance decision’ - a statement of instructions about medical and healthcare treatment they want to refuse in the future?
Can trusts be used to exclude assets from means testing?
Every time a trust is established there is a deprivation of assets - the client (settlor) gives away assets to trustees who become the legal owners of those assets. If that deprivation is for the purpose of avoiding contributions towards care fees the local authority can effectively treat the value of the trust fund as the client’s (settlor’s) capital.
The Society of Trust and Estate Practitioners (STEP) has warned that “... some unscrupulous providers in the market promise clients that by setting up a trust they can exclude assets from means testing for care fees’ and commented that ‘if a local authority suspects that there has been a deliberate ‘deprivation of assets’ to avoid care fees then it may pursue penalties, insolvency proceedings, county court judgements and sometimes a criminal record.”
Of course, there will be tax consequences in establishing a trust, primarily inheritance tax and capital gains tax, and the trustees will have to register with the Trust Registration Service. Trusts can provide the flexibility required to deal with changing circumstances so may well play a part in an overall planning strategy.