It is unfortunately true that pensioners who run out of liquid assets currently often have to sell their properties to pay for care, often a cripplingly expensive necessity. That is extremely sad – but one purpose of owning property is to accumulate capital to make sure one is prepared for this kind of eventuality. Children whose inheritance will be gobbled up by care costs stand to lose out; but taxpayers should not be in the business of subsidising relatively wealthy people. The status quo is unacceptable, with far too many heart-breaking and tragic cases – but the answer must lie in developing novel, workable insurance products, not in the nationalisation of yet another major liability.
The £1bn cost of the new cap – this sum is bound to rise massively – will be funded by a stealth hike in inheritance tax. Everybody with sufficient assets to qualify will pay far more in tax, regardless of whether they end up benefiting from state-financed care. This will be imposed by freezing the inheritance tax-free threshold of £325,000 until 2019, even though inflation on the retail price index is currently 3.1 per cent. By 2019, the threshold would probably have increased to £420,000 without the freeze; so this is a pretty massive raid and will hit many elderly folk and their children. In many cases, this will be very unfair: a family that cares for its own elderly relatives will be hit by the tax, even if they were able to avoid using institutionalised care.
This is a major and humiliating u-turn for George Osborne, who originally made his name as a political strategist when he pledged to hike the inheritance tax threshold to £1m, a move which prevented Gordon Brown from calling an election which he might have won. The abandonment of this popular promise is a timely reminder of the Liberal Democrats’ vast influence on tax policy.
It is important to remember that the average house in London is predicted to be worth £500,000 by 2018, according to the Centre for Economics and Business Research. The government says that it doesn’t want people to be forced to sell their homes to pay for care – but it clearly doesn’t mind that hundreds of thousands more grieving children will have to sell their family homes to pay for inheritance tax. Apparently, it’s OK to lose one’s home to the taxman – but not OK to lose it to care costs.
Even that is conceding too much to the government: for those who haven’t bought insurance, and who have assets but cannot afford the £75,000 chunk of care costs before the cap kicks in, the cost will be deferred, which means that it will be rolled up until death, and then paid out of the proceeds of selling the deceased’s property. The coalition’s claim that this policy is intended to stop people having to sell their homes doesn’t bear up to scrutiny.
A better solution would be to develop more insurance based-products and to encourage as many people as possible to take them out. The launch of the new pension auto-enrolment system provides an opportunity to transform the culture: more people need to put money aside for their old age, and not just for their more enjoyable retirement years. We should be engaging in a proper debate, centred around the need for greater personal responsibility and long-term planning, not reflexively nationalising costs and hiking tax.
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