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Dear Gary,
My parents sold their house four years ago when Mum had to go into a care home. The funds were split down the middle.
Dad went into a rental property next door to us. Mum later died and we inherited.
Dad still has more than £400,000 in savings. This sum is growing year on year because he is saving money on the basis that his rent and other expenses require relatively little money.
My question is two-fold.
First, if Dad goes into care, will all his savings be used up?
Second, regarding inheritance tax, will only £325,000 be excluded from tax or will his estate share in the extra allowance available for owning a house? And would things be simpler if Dad still owned a house?
My brothers have power of attorney and I am trying to get them to address this, but they just do nothing. I think as a family we need help.
Howard, by email
Dear Howard,
The choices made to date provided the opportunity for optimal care and support to your parents.
But the situation has evolved, rather than there being a strategy, and that means you now need to take stock of where you are and consider the possible financial implications of the decisions taken.
First, let’s look at your father’s potential future care costs. You do not say where you live. This is significant because the rules are different around the UK.
In England and Northern Ireland your father will be expected to pay for his own care if he has assets of more than £23,250. Between £23,250 and £14,250 the local authority will contribute to the cost of care.
When someone has less than £14,250 he or she will be allowed to retain the assets, but the local authority will consider any so-called “eligible” income and will grab that towards the cost of care.
It is therefore a potentially harsh regime with the outcome that, if your father requires care, he will be asked to pay for it until almost all his savings have gone.
In Scotland the equivalent capital limits are £32,750 and £20,250. In Wales you can have up to £50,000 of capital before you are asked to pay for your own care.
Successive Conservative governments have promised a care fees cap but have so far failed to deliver one.
In all parts of the UK there is the possibility of being awarded NHS “continuing healthcare”, which I have mentioned before in this column. This covers all the costs of care, just as if the person receiving care were a patient in an NHS hospital.
If your parents were still living together and one of them required care, the capital tied up in the family home would be disregarded while one of them still lived there. This also applies if there are other relatives aged over 60 living at the home.
In my experience it has also been applied when there is a relative aged under 60 but who is otherwise dependent or has never lived anywhere else, such as a child of the family who has never moved out.
To be clear though, even if your father still owned his own home, if he were living alone, as he now is, the capital invested in his house would be available to pay for his care and the local authority would take it into account in any financial assessment.
I hope you will agree with me that the good news is that if your father requires care and is a so-called “self-funder”, he will have the benefit of being able to buy the care he requires or desires, subject to the market being able to provide what he wants. This is better than ending up where the local authority decides is best.
If your father does not require care in the future and his capital remains at the level it is now (£400,000) or thereabouts, the further good news is that IHT should not be payable on his death. This is the second question you pose.
I’m not clear about what happened to your mum’s estate on her death. Does “we inherited” mean you and your brothers, or your father, or all of you? All UK-domiciled people have an IHT allowance called the “nil-rate band”, which is £325,000.
If your mum left anything to you and your brothers on her death, all or part of her nil-rate band will have been used. Anything she left to your father will be exempt from IHT and will not have used up any of her nil-rate band.
Your father has his own nil-rate band and, if he has not made any chargeable lifetime gifts, the full £325,000 of his nil-rate band can be offset against his estate on death.
You ask about the additional IHT allowance for those who own a home. This is the “residence nil-rate band” and is £175,000 per individual.
Your father will have his own residence nil-rate band and almost certainly your late mum too (I say this as it is unlikely to have been claimed when she died as they had sold the house, and you are only now asking about it), so a total of £350,000 is available as an extra IHT allowance.
Crucially for your father’s situation, the residence nil-rate band can be claimed even if the deceased no longer owns a “residence” at death. In other words, it can be claimed after downsizing or, as in your dad’s case, when a house has been sold and not replaced.
All this means your father’s estate should be IHT-free.
You mention your brothers and them being attorneys for your father. However, as there is no “action” that is required, there is no need for them to be involved.
Also, if your father still has capacity, he should continue to be empowered to make his own decisions.