The government's proposed lifetime social care cap has lifted a “key barrier” in the way of advisers can approach the subject of inheritance tax planning with their clients, an Abdrn executive has said.
Alastair Black, Abdrn’s head of industry change, said the “catastrophic risk of losing everything” was no longer something advisers and their clients needed to worry about when mapping out their financial futures following the policy change.
The planned cap for people entering care from October 2023 will be paid for with a rise of 1.25 per cent in National Insurance and an equal rate of dividend tax, and mean any care costs over £86,000 will be covered by the government - provided the individual's assets sit under £100,000.
Black said social care can present a kind of “cliff-edge” when it comes to financial planning. “Either clients won’t need anything, or they could potentially need hundreds of thousands,” he explained.
“There is no doubt this announcement is a good thing for advisers and their clients as a clear commitment to tax funding will give them confidence for the first time that long-term care planning will become more straightforward, with tax parameters and personal expectations clearly known.”
Black said most people don’t have £200,000-£300,000 to put aside in their financial plan, which is how much care could cost if there was no cap.
“Currently people can lose their entire wealth to social care,” he explained. “And the averages can hide the spread. Some people are vulnerable to over half a million in care costs.”
He continued: “This means advisers are working with uncapped risk. There’s no real route for advisers to manage this.”
With a government subsidised cap, Black said the risk becomes known - hence making it easier for clients to plan around inheritance.
“Family planning is supported by a cascade of wealth,” said the Abrdn executive. The unmanageable risk of no money passing down the generations can threaten this, he added.
As well as removing a key risk barrier for advisers’ clients, Black also reckons this cap will place more confidence in clients to have conversations they previously “feared”.
“There were a range of clients which sat in the ‘too hard to deal with’ bucket,” he recalled. “This has made it too difficult to talk about IHT. But this cap opens up the possibility for more conversations on topics clients were previously unwilling to talk about. Because now the worst of those fears have gone.”
Whilst Black acknowledges many advisers have still been having those conversations - or at least trying to - he said the cap will make them a “whole lot easier”.
Working out the assets
What can make up the asset floor of £100,000 depends on where a person is receiving care.
The government's means test will count financial assets owned by those receiving care in their own home - i.e. savings and investments.
But for those who wish to receive care in a care home, their assets in the means test will also include the value of their home, and any second homes they have.