Do I Care ISA?

The care fee problem is massive, it is estimated that in 2020/21 there will be a £5.5 billion funding gap in the costs of social care. This is set to rise to £12 billion by 2030. Meeting the potential huge future costs of care is therefore a massive headache for the Government and the elderly. The Government were planning to release their proposals on dealing with this problem in the summer, but this has been delayed to the Autumn.

It has been reported in the Sunday Telegraph that in its upcoming Social Care Green Paper the Government is planning to introduce a “Care ISA” as a means of dealing with the problem.

An investor could make encashments from a Care ISA to meet his/her care costs, sounds the same as an ISA would be at present, however, any residual value of the ISA would be free of inheritance tax on death, which is a good benefit, this is a drawback for ISAs at present.

Currently the value of ISAs on death counts as part of the deceased investor’s estate and could be subject to inheritance tax if the total estate:

• passes to somebody other than the surviving spouse or a charity; and
• exceeds £325,000 in value.

Of course, ISAs that invest in AIM shares may qualify for 100% business property relief once they have been held for two years, although AIM shares are much higher risk.

A surviving spouse currently benefits from an extra ISA allowance equal to the value of the deceased’s ISA on death, call an Additional Permitted Subscription (APS), but this does not help in anyway with care funding, or inheritance tax.

The introduction of a Care ISA is just one of the possible solutions available to the Government. Another would be to grant tax freedom on funds withdrawn from pension funds that are used to meet the cost of an individual’s care or offering tax relief on insurance to cover the costs of care fees – if providers could be encouraged to re-enter the market.

Would the introduction of the Care ISA be good way of encouraging people to make investments that would cover the costs of their care? I don’t think so, it’s a nice idea, but if you don’t have the money, offering a new account won’t make any difference. However, if it were a success, it would mean that the Government could reduce the need to raise taxes to meet the costs of care, now that would appeal to everyone.

Unfortunately care costs are largely an unknown quantity and it may therefore be difficult for savers to estimate how much to set aside. Restrictions would also be needed to prevent people using the Care ISA as a form of last-minute inheritance tax planning and benefiting only the very wealthy.

However, I can’t help but think ISAs are becoming unnecessarily complex, surely if someone has insufficient means of savings, offering them a new product won’t encourage someone to save, just because it’s called a Care ISA.

However, all will be revealed when the Green Paper is published.