Proposed Care ISA ‘would benefit the wealthy’
The government is reportedly considering a ‘Care ISA’ which would be exempt from inheritance tax but experts say the move would add confusion and benefit just the wealthiest of families.
One of the main benefits of saving into an ISA is that it’s free from tax so you keep all the interest you earn.
But after death, the ISA money forms part of the deceased’s estate which means if it’s left to anyone other than a spouse, it may be subject to inheritance tax (IHT) – 40% levied on anything above £325,000.
As such, savers are often urged to spend this money rather than keep it to fund later life care and are also recommended to deplete ISA savings before raiding pension pots in retirement.
But given that latest figures on the total public funding for social care in 2016/17 was £17.7bn, the government is seeking ways to tackle the challenge of an ageing population and increased care bills.
A report in The Telegraph this weekend suggested the government is considering a ‘Care ISA’ as part of the upcoming Social Care Green Paper. It would be exempt from IHT and while the ISA would be capped, any unspent amount could be passed on to the deceased’s family.
‘Tinkering with the savings system for political purposes’
Experts have criticised the ‘Care ISA’. Former pensions minister and current director of policy at Royal London, Steve Webb, said it’s no solution to the care funding crisis.
He said: “Care costs can vary hugely between those who run up six figure bills after extensive residential care and those who face negligible costs. It would be impossible to know in advance how much to save into a care ISA, with most people saving too much, and some people saving far too little.”
Ed Monk, associate director for personal investing at Fidelity International, said: “It’s not clear how a Care ISA that alleviates IHT will help the majority when, at the last count, IHT falls on just 4.2% of estates.
“Wealthy families who would stand to benefit from a Care ISA already have many advantages in the tax system if very costly care bills land and they are likely to already have a store of wealth in their home to pay for care which they can pass on without tax if it’s not needed.
“This seems to be a case of tinkering with the savings system for political purposes rather than addressing the needs of the majority.”
Steven Cameron, pensions director at Aegon, said for many, the most obvious solution is likely to be linked to retirement savings, particularly where individuals have defined contribution pensions.
“Here, under the pension freedoms, individuals at retirement could notionally ‘ringfence’ or set aside part of their retirement fund to meet possible future care costs, taking an income from the balance,” he said.
“If the money is not needed for care costs, the ringfenced amount could be used for other purposes or left to a partner or other beneficiary, which is already usually free of any inheritance tax liability.
A Department of Health and Social Care spokesperson, said: “Our green paper due in the autumn will set out our plans to reform the social care system to ensure it’s sustainable for the future.
“In developing the green paper we are looking at how we can support people with the costs of their care in a way that is fair to all generations.”
Related: See YourMoney.com’s How to beat the inheritance tax trap for more information.