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Misconceptions of financing care home costs

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It is now time for you or an elderly relative to go into care home. For whatever reason, it is no longer possible to be self-sufficient in your own home. Perhaps you are reading this thinking there is a possibility of this situation in the foreseeable future. One question on your mind will be how much will this cost and who is paying.

We do know that the cost is likely to be substantial with many nursing care homes being over £30,000 per year. Costs vary throughout the UK depending mainly on location and disability of the individual.

Our initial thinking is that the government should cover this cost. If the individual has to cover this cost, it is likely to be a substantial sum from their estate reducing the value passed on to the next generation. This is therefore an important issue when advising on the individuals’ estate and inheritance tax (IHT) planning.

First off, we need to identify what if any support the government will provide. We know that if the individual has sufficient annual income to pay for the care themselves, the cost will be their responsibility. As elderly people generally have low income and high assets, the government has in place capital limits to determine how much they contribute to the cost.

Capital less than £14,250 – The local authority will fund the full cost of care.

Capital of £14,251 to £23,250 – The value of capital within this range is converted into tariff income (e.g. every £250 of capital in this range is treated as £1 of additional income) and will be taken into account when determining the authorities contribution.

Capital more than £23,250 – The individual will be expected to cover the full cost.

It is clear that many will breach the limit of £23,250 due to owning property (mainly their homes) and will have to cover all costs.

The big misconception

For many people the most valuable asset they hold will be their home. There is a common belief that gifting the asset to a relative will bring the capital value below the £23,250 level and will qualify for government assistance.

This is understandable as this is a common strategy regarding IHT planning and can indirectly benefit an individual’s right to government assistance. This is perfectly legitimate tax planning.

If the individual is not exposed to Inheritance taxes and gifts the home to a relative, it will be seen as deliberate asset deprivation to obtain government funding. Their main argument is that there is no difference between gifting the asset and leaving it to them in the will.

There is no hard and fast rule to identifying this ‘motivation’ as it is based upon case law. These situations are challenged frequently and the local authority have great success.

How do I protect my wealth?

Long term care planning has become more popular over the last few months due to the budget and you may be aware that the government has introduced a cap so that an individual will pay no more than £70,000. Now it is known how much exposure people have, there are insurance policies that can be structured so that any amount up to £70,000 can be covered should you have to go into care.

For those with immediate needs, there are several method of funding without selling the home such as equity drawdown or investing in income generating bonds that can be setup so that the capital passes to beneficiaries on death.

Conclusion

Gifting assets with the main intention of obtaining funding will likely be challenged and have a negative outcome.

There are insurance to protect you from future risks of having to go into care.

This is a complicated area of financial planning so advice needs to be sought before taking any action and ideally before the event becomes immediate.

Construction Industry Scheme repayments

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Guidance and information has been prepared by HMRC along with assistance from our governing body to ease the cashflow burden faced by subcontractors.

A two page factsheet answering key questions regarding the reclaim of CIS tax through a company subcontractor. If you are involved with a company that pays and/or suffers CIS on its income, we would strongly recommend that you read this notice.

Please CLICK HERE to access the factsheet. Additional guidance will be issued over the coming weeks and we will keep you informed when they arrive.

Alternative funding – Utilising the SSAS

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Everyone knows that access to funds is becoming more challenging. This is causing problems for business restricting development and ultimately long term sustainable growth.

It is commonly believed that all pensions lock away money until retirement. This is not strictly true for all pension schemes and there are opportunities for SSAS’s (Small Self-Administered Schemes) to issue funds in the form of a loan. There's no need to smash the pig.

The most common use of the SSAS is by owner-managed businesses whereby the SSAS holds a commercial property and the business pays a market value rent. Both the property value and the rentals form part of the pension pot. All growth is protected from taxes.

Rental payments accumulate over the years and this cash maybe very useful for the business. A loan can be made from the SSAS to the company so that the business can move forward.

The facts are:-

• The loan cannot exceed 50% of the Net Assets held by the SSAS

• The loan must be secured against an asset of equal or greater value as a first charge (i.e. no other debts have priority over the asset). This could be an asset held by the business or the members of the scheme

• Interest must be charged at least 1% over the base rate. Movements of the base rate over time is irrelevant as the rate is set at the loan is made. The interest will also obtain tax relief by the business

• The term of the loan must be no more than five years

• The interest and capital of the loan must be repaid in equal instalment at least annually

Comparing this to other funding arrangements:-

• You keep the interest as this goes into your pension pot and is sheltered from taxes

• The security is likely to be the same as demanded by other finance providers

• The interest rate can be set by the members of the SSAS so higher rates will obtain higher tax relief

• The term of the loan is likely to be shorter than that offered by other providers should they be willing to advance funds

• The SSAS may not hold the necessary cash funds required for the business development. This funding can be used alongside other sources of finance

Is it time to review how your business is financed?

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