Don't rule out the death tax

by Ed Bowsher on 04 July 2011  |  6 comments
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The new social care proposals make a lot of sense, but funding is still a problem. The so-called 'death tax' could be the answer.

Social care is a big problem for the UK and it’s only going to get bigger. As the population gets older, it’s crucial that we work out a way to offer high-quality care for everyone who needs it.

Today’s report from the Dilnot Commission is a sound starting point that contains some sensible proposals.

Under the proposals, no one would have to pay for their care if they had savings and assets worth less than £100,000. (The current threshold is £23,250).

What’s more, if you had assets worth more than £100,000, there would be a cap on your total contributions for care. Once you had reached that cap, the government would step in and pick up any further bills. Dilnot has suggested that the cap should be somewhere around £35,000. (You might have to pay extra for ‘hotel costs’ above the £35,000 cap.)

This is a sensible plan because it would reduce fear and uncertainty for many people.

Problems

There are, however, two problems. Even though, most elderly folk will have to pay for some or all of their care, the government will still have to find some extra cash. Dilnot estimates that the current cost for the government would be £1.7 billion a year. Going forward, that could rise by 50% as the size of the elderly population grows.

The other problem is Dilnot’s proposals are unfair to the middle classes. The poor won’t suffer because they won’t have to pay anything - their assets amount to less than £100,000. However, the middle class and the rich will have to pay the same amount - £35,000 plus hotel costs. I don’t think that’s fair.

Let’s deal with the funding problem first. Where will the money come from?

The government could decide just to borrow the extra cash but that would probably be foolish given the size of the deficit. Another option would be increasing income tax or other taxes but then we’d be running the risk of slowing down economic growth – especially if increase was on income tax.

My answer would be the so-called ‘death tax.’  In other words, when you died, your estate would have to pay a tax that would fund social care. It could be applied to all estates larger than £100,000 and would be paid regardless of whether the deceased received social care or not. The last government proposed such a tax at a 10% rate.

This tax would be on top of Inheritance Tax and would apply to smaller estates than Inheritance Tax where no tax is charged on estates that are below the £325,000 threshold.

I know that such a tax would be unpopular, but I think it makes sense. As things stand, some children find they inherit far less money than they expected because the costs of social care have eaten up their parents’ assets. If we had a death tax and combined it with the Dilnot proposals, there would be less of a lottery.

Sure, some elderly people would need long-term care and others wouldn’t. And those who needed care would have to shell out £35,000 plus hotel costs. But at least there would be a limit and most estates would make some form of contribution to the costs of long-term care.

What’s more, the rich would make a bigger contribution than the middle class because the death tax would be charged on a percentage basis.

I suspect that David Cameron would never sanction such a proposal. He knows that Inheritance Tax is very unpopular with his political base. But unpopular policies are often the best ones.

More: How to prepare for your care in retirement