In the CP’s 2014 review of taxation, From Each According To Their Means , little emphasis was placed on hypothecation – the principle under which money raised from a particular tax is used for a pre-specified purpose. This makes sense. The primary purpose of taxation is to finance the totality of government expenditure and, subject to borrowing to invest for the future and the cyclical nature of economic activity under capitalism, budgets do need to balance. When, however, there is an opportunity to raise revenue which can be matched with a clear social need for government expenditure, it makes sense, if only for presentational purposes, to link the two.
Inheritance Tax is currently a “voluntary” tax, not only for the very wealthy but also for large sections of the upper middle class who also see it as their right to pay as little of it as possible. Estates worth less than £325,000 are exempt and the rate of and 40% thereafter is easily avoidable by employing any half-competent solicitor. The Duke of Westminster’s estate, for example, is said to be worth some £13 billion, but no Inheritance Tax will be paid following his death last month as his property is held in trusts. In consequence, Inheritance Tax yielded a paltry £4.6 billion last year. Yet according to even ONS statistics , wealth in private hands is now worth £11.1 trillion, with more than half owned by the wealthiest 10%. If we assume an average lifespan of 60 years between inheritance and death, this indicates an average effective rate of Inheritance Tax of only 2.5%. In reality this average effective rate is much lower due to the wealthy concealing their wealth and the average interval between inheritance and death being much less than 60 years.
Consider now the government’s current level of support for those in residential care homes. According to Laing & Buisson Care of Older People UK Market Report 2014/15. care home charges last year were on average £29,250 per annum, rising to over £39,300 if nursing care was required. Charges in the London area are significantly higher. Support from local authorities is available (although increasingly difficult to access due to the austerity squeeze from central government), but the care home resident has, in effect to surrender any capital in excess of £14,250 but less than £23,250 at a rate of £250 for every £1 per week of support and 100% of any capital in excess of £23,250. For a small estate of, say £50,000, this is equivalent to paying Inheritance Tax at 72%.
What is to be done? According to the Dilnot Commission in 2011, there should be a cap of £35,000 on the amount an individual would have to pay for their own care costs during their lifetime. Above that level, the state would pay a standard rate for care, regardless of the individual’s wealth. People would still be liable for costs of accommodation and food in a care home, but this would be capped at £10,000 a year. In addition, the commission called for a big increase in the threshold of savings and assets above which the state offers no help with care costs. The limit should rise from £23,250 to £100,000.
These were modest proposals and failed to go to the heart of the problem. The government nevertheless chose to ignore them. Instead it included a vague manifesto commitment to introduce new rules designed to prevent older people from having to sell their homes when they go into care. This has been deferred until 2020. A lifetime cap on care costs in England of £72,000 was also proposed but deferred after council leaders asked for the allocated funding to be used instead to paper over the on-going crisis in day-to-day social care services.
According to another report from Laing and Buisson, residents (and local authorities) currently pay £14.3 billion per annum in care home fees. This figure is likely to increase due to:
- pressure on fees from cash-strapped local authorities driving many smaller homes out of business, enabling the rest to put up their fees; and
- pressure on care homes to improve the pay of their often badly paid and exploited staff. Even the Tories’ so called living wage will have an effect here.
If, however, we disregard the profits earned by care homes – in a sane world they would be run by local authorities, not profiteers – and estimate that the economic cost of the services currently provided is, say, three times that currently paid, this could be paid for by a tenfold increase in the yield from Inheritance tax. Given the current very low effective rate of 2.5%, this could be achieved by abolishing the trust loophole and ensuring other similar scams are not allowed to flourish. With an average rate of tax of 25%, we could have care homes for all with most people still being better off . With a graduated rate of tax, 90% of people could be better off. For example, on the figures above, a rate of 50% on the top 10% of wealth owners and a zero rate for the rest of us could provide care homes for all.
I don’t claim that the above calculations are anything other than rough estimates. The overall position they reveal is, however, undeniable. There is a solution to the problem of paying for care homes: it’s an Inheritance Tax that is no longer voluntary..