'Care ISA' To Solve UK Crisis

ISA would carry its own allowance reflecting the cost of long-term care and could be passed on without triggering inheritance tax.

Could a new ISA solve a looming long-term care funding crisis? A Care ISA that is exempt from inheritance tax (IHT) is being actively considered by the government, The Sunday Telegraph has revealed, but the proposals have been criticised by figures from the pensions industry.

According to official figures obtained by former pensions minister Ros Altmann the over 60s hold over £300 billion in ISA savings. 

Funds held in ISAs are subject to IHT on death, meaning they will count towards a person’s IHT nil rate band of £325,000, unless they are being passed on to a spouse in which case no tax is paid (Alert! unless they are non UK domiciled i.e. Chinese, whereby they will face an inheritance tax liability of 40% above their nil rate band - requires specific trust planning; we can help with this too just ask).

The surviving spouse benefits from an additional ISA allowance up to the value of the deceased’s savings. 

Pension funds can be passed on tax-free if the holder dies before their 75th birthday, otherwise the beneficiaries will pay tax at their marginal rate.

So what would the Care ISA do?

The Care ISA would have its own allowance, capped at an amount that would reflect care costs. This whole pot would be exempt from IHT regardless of who it is passed on to.

The idea is that people do not lock away savings to pay for possible future care costs because they are worried that funds they do not use would be taxed.

According to the website payingforcare.org the average cost of residential care in the UK is £31,200 per year, rising to £43,732 if nursing care is necessary.

In support of the proposal Altmann said: ‘At last, people may set money aside, in advance, to cover future care costs (currently they do not think about it), rather than suddenly having to find money at the very time they are most vulnerable. Older people's ISAs may otherwise be spent well before they need care, and they may regret this later but it would be too late.’

However, many have expressed their misgivings about the policy, including Altmann’s predecessor in government, Steve Webb, director of policy at Royal London. ‘It is very difficult to see how a care ISA would make a meaningful contribution to tackling the social care funding crisis.’ He said. ‘The latest figures suggest that 19 out of 20 estates pay no IHT, suggesting that an IHT break would be irrelevant for most savers.’

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Watch this space for more developments!

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