Recent care tax proposals and IHT

[MrsSusanT]

I wonder if anyone could guide me on the following query regarding proposals in a recent manifesto regarding the payment for care down to £100K of estate remaining.
My mother has an estate valued around £800K if you include her house. This situation is not uncommon where she lives in Kingston-on-Thames and her house is by no means exceptional. Suppose her care package by the time she dies has reached, say, £200K that leaves an estate of £600K - still above the threshold level for IHT. Would IHT be payable on the £800K or the £600K?
Taking it a step further, if her care costs had reduced her (virtual) estate down to the £100K limit, would this be taxed in any way?
Just trying to decide how to vote...

[AnthonyR]

You only pay IHT on assets you have, so once the money has been spent on care it's not longer in your estate for IHT purposes. So in your example, her taxable estate would be £600k.

It may be that the local authority seek to put a charging order on the property, in which case the debt is deductible from the estate as well, so she has assets of £800k, debt of £200k, gives a net estate of £600k taxable.

If she leaves the house (or what's left from a sale of it) to her children or grandchildren there's an extra £100k (rising to £175k), so total £425k rising to £500k called the residence nil rate band.

The other thing to bear in mind is that if she was widowed (still married when her husband died) then she may have the benefit of 2x nil rate bands giving £650k, plus the residence nil rate band x2 bringing it up to £850k rising to £1m in 4 years.

So depending on the circumstances she may not have exposure. Either way, the care limits are somewhat subject to abuse (they only apply to 'care' not accommodation or food) so I wouldn't let this single element impact too much on your decision!

[MrsSusanT]

Thank you Anthony for your clear appraisal of the situation. And also the reminder regarding the husband's IHT allowance.
My father died in 1972 when they were living in the house Mum still lives in. He died intestate, so the situation is quite complicated. I believe that my mother inherited approximately two thirds of his estate and the rest went to the three children. We (the children) never required her to move out of the house so she has lived there ever since. I believe that it may be possible to claim some of my father's IHT allowance, but I am unsure what percentage.

Again, many thanks for your help,
Susan

[AnthonyR]

That does complicate matters. There is still the possibility of some transferable nil rate band, subject to how much of his nil rate band/IHT threshold was used at the time.

The position goes back to before IHT existed as a tax, but in 1972 (post 22nd March) the threshold was £15,000, so you'd need to look at the percentage of that threshold which was used at the time. The unused percentage will be transferable.

So as an example, if £5,000 was passed to the children, this would leave £10,000 or 66%. This would mean that 66% x £325,000 = £214,500 would be transferable to your mother. If more than £15,000 was passed to the children, none would be transferable.

Because your father died before the residence nil rate band was introduced he couldn't have used it and as such the full £100k-£175k will be available to transfer.

Just be aware that as you own a share of the property, in the event that it was sold, your share would be subject to CGT and not exempt as your mother's share would be.

[maths]

If death pre 22 March 1972 there was no inter-spouse exemption and accordingly there would be no nil rate band to transfer.

If death occurred on or after 22 March 1972 an inter-spouse exemption of £15,000 was available.

I can't recall the intestacy rules at that time but suspect there may be no unused nil rate band to transfer.

If under the intestacy rules at that time it was possible for the matrimonial home to be appropriated entirely to the surviving spouse then maybe the children do not own any beneficial interest in it and so no CGT issues arise.

The residence nil rate band should be available to transfer.

[MrsSusanT]

Thank you both for your replies.

It does seem very complicated and linked with the intestacy rules at the time. I think we need to get professional help and I would prefer to get a ruling on this sooner rather than later. Do you think we should approach a tax accountant, a solicitor or write direct to HMRC?

Susan

[AnthonyR]

I'd suggest you speak to a chartered tax advisor or solicitor that specialises in IHT and estates - not just a general accountant or solicitor as they are unlikely to deal with the technicalities on a regular basis.

I wouldn't bother with HMRC - their helplines are non-binding and I've had a number of experiences where clients have been misinformed by them.