Square One Law warns that government plans for elderly care will create greater emphasis on Inheritance Tax Planning
Newcastle law firm Square One Law has said, that following the announcement of a new freeze on inheritance tax (IHT) to fund a cap on social care for the elderly it is even more necessary to implement or revisit long term estate planning.
While it broadly welcomed the move which will see the introduction of a £75,000 cap on the cost of care (excluding “hotel costs”) and an increase in the limits of eligibility for means tested assistance towards the cost of residential accommodation, it has highlighted that over time more people will subject to IHT and that the burden could be substantially higher for an estate worth £1 million than it would eventually have been had the policy of raising thresholds not been abandoned.
The level at which inheritance tax becomes payable will now be frozen at its 2009 level of £325,000 until at least 2019. The rate of tax is then 40% so an estate of £500,000 could have a tax liability of £70,000. The decision will mean that the IHT burden will be significantly greater under the new rule than was initially proposed in the Chancellor’s widely trailed ambition that “only millionaires will pay inheritance tax.” (Rt. Hon George Osborne MP Oct 2007) with it being estimated that a further 5000 estates will become liable to IHT as a result.
The firm says inheritance tax is often “double taxation” as it is levied on assets that have normally been accumulated using income that already been subject to tax.
Stuart Hamilton, partner and head of Personal Business at Square One Law, said: “As a result of these changes, many more families across the North East will be liable for bigger tax bills after the death of a relative. Care for the elderly will, in effect, now be subsidised by the next generation.
“On the one hand in principle this move is to be welcomed as a step in the right direction as it does seek to partly address an iniquitous situation where some people are having to part with their homes to fund social care.
He added: “At a time when we are experiencing a burgeoning elderly population, the cost of social care is already at a fairly unsustainable level and we are facing a potential global health time bomb in the number of people now suffering from and anticipated in the future to suffer from dementia. In the light of this any reassurance to the majority who worry about the future funding of their possible care is helpful.
“However, the knock on effect is that the cap has to be paid for somehow and IHT has become the solution to quite an intractable problem. By fixing the cap at £325,000 until 2019, this will adversely affect many more people, particularly with asset values expected to increase as we pull out of recession.
“People with larger estates can though take professional advice to mitigate punitive inheritance tax bills. Structuring assets, creating trusts and properly planning gifts to family members can reduce potential IHT liabilities. IHT has often been described as a “voluntary tax” but the key to successful IHT mitigation planning is to start the process early. “