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.
Toreston Bell, chief executive at think tank Resolution Foundation, told FTAdviser: "This could create a strong incentive for people to own their home and not hold lots of financial assets if they will need domiciliary care."
Conversely, it could also discourage more people from using care homes. Though as Bell acknowledged, many families already deem care homes a last resort.
"It does create something of a disincentive to go into residential care homes," he said.
A potential loophole Bell identified was that people could start alienating some of their assets ahead of needing them, such as giving money to their kids early.
"This puts a huge emphasis on IHT planning," said Bell, who added advisers would see an uptick in requests around IHT following the social care policy announcement.
It will also see local authorities engaging directly with advisers' clients, due to the fact the policy does not, in reality, cap spend, according to Bell.
"The only thing which has changed is the thresholds, so more assets are being protected. If you choose more care than the local authority thinks is necessary, then none of that will count to the £86,000."
Mike Stimpson, a partner at Saltus, said people who go into care "will be able to pass on more of their wealth to family" as a result of Johnson's reforms.
He continued: "[This will] pave the way for the government to amend IHT rules to increase tax receipts to cover the deficit and therefore, put a spotlight on IHT planning."
More to come
Some industry experts are reluctant to celebrate the lifting of barriers for advisers around IHT planning and social just yet.
Stephen Lowe, group communications director at retirement specialist Just, said a cap of £86,000 “is only a start” when considering the cap does, at least for now, exclude the ‘hotel’ costs such as accommodation and food.
“It could easily take perhaps three or four years and perhaps £200,000 to £400,000 of associated spending to reach the cap,” he explained.
For that reason, Lowe said “financial planning to avoid catastrophic loss of assets will continue to be a valuable service provided by financial advisers”.
He cited Just’s Care Report published in June, which found almost six in 10 people (58 per cent) aged 75 or older have been delaying making financial plans for care until the government got off the fence and said how it planned to fund long-term care.
Whilst the announcement “is helpful for financial advisers and their clients” by laying down the fundamentals, Lowe stressed “the detail needs to be examined”.
Shaun Moore, tax and financial planning expert at Quilter, agreed at £86,000, “the proposals will still place a pretty sizeable burden on individuals to stump up huge costs for their care provision”.
If the government did decide to include these costs, Moore highlighted the administrative challenges facing local authorities.
“[They] will need to provide people with accounts set at zero to accurately track the cost of care. This could provide an administrative challenge.”
Will Hale, chief executive at Key Group, said: “The devil will be in the detail and even with these changes, it is important to remember that older people will still need to make a substantial contribution towards paying for their own care.”
Hale added choice was important, citing the firm’s research in recent months which found three-quarters of over-55s would like to receive care and support in their own homes.
This will likely see savings, pension income and housing equity “all have a role to play” in supporting people as they use their own assets and the available state support to meet their needs in later life, Hale concluded.
ruby.hinchliffe@ft.com
