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Paying for care fees? Read this first

It is a sad fact that the number of people in the UK needing to be looked after in a care home is rising, and the trend is only going one way – upwards.

by
Louis Coke

22.06.2017

It is a sad fact that the number of people in the UK needing to be looked after in a care home is rising, and the trend is only going one way – upwards. If you are faced with funding care fees for a loved one, often the only two options people consider are to rent out your loved one’s property and use the rent to pay (or at least contribute to) the cost of care, or to sell the house and use the proceeds to pay the care fees.

There is, however, another way.

We have many clients in the situation outlined above, and they look to us to provide a portfolio of investments that can provide an attractive level of income, can make use of tax allowances (capital gains tax and ISA allowances for example) and provide a low maintenance way of ensuring that their loved ones’ capital is looked after and care fees are paid.

This is probably best illustrated by way of example. Let’s assume our fictional client, Bob, has care needs which are too great to be dealt with at home. His children work full time.

Bob’s house is in Guildford and is worth £750,000. He has pension income of £1,500 per month (£18,000 per year) and savings of £30,000. His care fees are £30,000 per annum.

Option 1

Rent out Bob’s house.

This produces a rental income of £22,500, or £19,125 net of property management fees.

The income here is fully taxable at Bob’s marginal rate. The risk here is if the tenant does not pay their rent, and if there are any void periods (i.e. time when the property is not rented). Also, all the income is coming from one source (the tenant).

In this example, the rent from the property just about covers the care fees. It doesn’t leave much of a safety net for any property repairs and maintenance, tenant issues, redecorating, or any extra care costs.

Option 2

Sell Bob’s house. Leave cash in the bank and take care fees from this cash balance

This is possibly the most straightforward option but the downsides are numerous:

  • Needs multiple bank accounts to be within FSCS protection
  • Low returns on cash on deposit
  • Vulnerable to inflation

Option 3

Sell Bob’s house, invest the proceeds in a Discretionary Investment Portfolio.

The problem with the two options above is that in the case of option 1, all the income is coming from one place and the tax is fairly high (property income is charged at the same rate as earned income). In the case of option 2, inflation is going to hurt the real value of the funds, interest on cash deposits are low and the money is not working, it is simply sitting on deposit.

There is a third option which may be worth considering. We manage investment portfolios for a number of clients which create a useful income stream, whilst aiming to preserve and possibly grow the funds over the long term.

Carrying on with our example, Bob invests the house sale proceeds (£750,000) into a diversified, discretionary management portfolio run by our team. The portfolio immediately provides an income of £37,500 per annum. This pays Bob’s care fees and leaves a little cash left over, to be reinvested. There is not the issue with void periods as in Option 1, and income is coming from many (20+) different sources, so if one investment stopped paying dividends, the portfolio still produces an income return.

We also use our client’s Capital Gains Tax and ISA allowances automatically, thereby enabling the funds to work more tax efficiently. Unlike with having a property with a tenant, having an investment portfolio can be rather hands off. Your Investment Manager takes day to day responsibility for the management of your investments and then reports to you on a regular basis, informing you of portfolio performance and outlook.

If we take our three options and fast forward three years, let’s see how they got on.

Bob’s care needs have advanced somewhat and his yearly care fee bill is now £55,000

Under option 1) the house rent does not now cover the care fees. Bob’s pension rises by inflation each year. Assuming inflation amounts to 2% per year, Bob’s pension is now £19,100 (Gross). The rental from the property has risen by 3% per year, now giving £24,586 (Gross). Accounting for property management fees and income tax, this gives Bob roughly £34,100 per year of income.

The remaining £20,900 per year will have to be found from Bob’s savings. Once this is depleted, the options may be to either sell the house, or for Bob’s children to make up the difference. Under some circumstances, the local authority may take a charge over Bob’s property, such that they can be repaid upon Bob’s death.

Under option 2), £90,000 has been spent on care fees so far (assuming £30,000 per year for the sake of simplicity). This has been made up of his pension plus savings. The savings pot is now £744,000. By the end of 2020, the savings pot will be £707,000.

Under option 3), the £750,000 invested may have grown by 5.15% (half of what the FTSE 100 has achieved over the last three years) and is now worth £788,625. Previous care fees have been covered by the income generated from the portfolio.

The portfolio is still generating an anticipated income of 5%, equating to £40,125. Therefore the capital need on the portfolio is nil because with Bob’s pension income, the care fees are met. Some of this income is tax free, having been generated from Bob’s ISA.

It must be remembered that investment returns are by no means guaranteed and that markets do go up and down. However, considering the income that can be generated from an investment portfolio combined with the tax efficiencies of using personal allowances and having a diversified source of income, we believe it is a rather compelling alternative to the first two options listed above.

If we may be able to help you or your family members please do contact us for further information and to discuss your particular requirements.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. If you are unsure of the suitability of your investment please seek professional advice.

Appendices

The assumptions made in the above examples are intended for illustration only. Individual tax circumstances may produce different results from that outlined above. We have simplified the figures for the purposes of illustration

FTSE performance is from 13/06/2014 to 14/06/2017

Tax rates & personal allowances have been assumed to remain at 2017/18 levels for simplicity of illustration

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