Death, Taxes and Long Term Residential Care

Benjamin Franklin famously said that “In this world nothing can be said to be certain, except death and taxes”. Most of us would feel that this is as true today as it was in 1789 when this quote was first recorded. If Franklin was still alive today he might have changed his statement to say: In this world nothing can be said to be certain, except death, taxes and the need to understand the CRAG guide.

Not familiar with the CRAG guide? Well we probably all should be. CRAG, or to give it its full title “Charging for Residential Accommodation Guide” is the 120 page guide to Local Authorities on how and when to charge for Residential Care. With ever increasing life expectancy most of us are likely to find one or more of our loved ones needing long term residential care in the future, and therefore need to understand the payments that may be required. Under CRAG a resident with capital in excess of £23,250 is expected to pay the standard charge for their accommodation. With average annual care home fees in 2013/14 in London and the South East being in excess of £33,000, its pretty easy to see how lifetime savings can soon be used in a relatively short time to cover the cost of long term care. CRAG has an entire section devoted to the “Deprivation of Capital” and how local authorities may consider if residents have deprived themselves of capital in order to reduce their accommodation charge. Accordingly, care needs to be taken before giving away assets. Nevertheless, careful planning in conjunction with general Inheritance Tax (IHT) Planning can help you protect your lifetime savings from being used up on care costs. Some of the key areas to consider are:

• The use of the annual £3,000 gift exemption and the £250 small gift exemption.
• Assets should be held jointly by those who are married or in civil partnerships. The partners half of the assets will be automatically excluded from the capital calculations under CRAG.
• Property owned by couples should be held as tenants in common rather than joint tenants. Under CRAG where a partner (or in certain circumstances a relative) are living in a property it will be excluded from the capital calculations.
• Wills should be looked at with a view to leaving the £325,000 IHT threshold into a will trust. This was a common practice before 2007 when the IHT rules were changed so that any unused IHT threshold could be transferred to a surviving spouse. The use of a will trust can mean that this £325,000 would no longer be considered as capital under CRAG and this is not viewed as deliberate deprivation of capital.
• Investment Bonds are generally excluded from capital under CRAG and therefore can form a useful part of any investment portfolio.