Individuals are revising their tax-planning approaches to account for inheritance tax (IHT) being applied to unused pension pots starting April 2027. However, an unintended consequence of this planning is its effect on long-term care expenses.
The issue
In England, if an individual’s capital and savings exceed £23,250, they are responsible for covering all their long-term residential care costs. While this threshold may seem low, it’s important to note that the value of a home will not be considered if a partner (or a relative aged 60 or older, or a dependent child) continues to reside there. Consequently:
Deprivation of assets regulations stipulate that individuals cannot secure funding for care costs by transferring assets to family members. This is where the new pension tax regulations pose a challenge: many seniors are trying to minimize future IHT liabilities by withdrawing significant amounts from their pensions and subsequently gifting that money to their children and grandchildren.
A local authority may view such gifts as a deliberate deprivation of assets.
There is no limitation on how far back local authorities can investigate. If an individual is determined to have deprived themselves of assets, they will be considered as still possessing the money or assets that were given away.
Considering the increased life expectancy, the financial repercussions of unexpectedly needing to cover care costs can be considerable.
Finding the right balance
A significant gift may achieve the IHT goal, but it could lead to complications regarding future care expenses. Local authorities will assess whether care needs were predictable at the time a gift was made, making earlier gifts, when the individual was in good health, much easier to defend. Meticulous record-keeping is crucial. The documentation should demonstrate that the intent behind a gift is legitimate estate planning or family assistance, rather than an attempt to evade care costs.