Or, millions now living will never pay inheritance tax. I’m going to do something odd for a second: I’m going to praise the intention behind the most controversial aspect of the 2017 Conservative manifesto. You see, whatever you may think about the politics of the situation, the authors did at least try to do something about paying for social care.
The common wisdom is now that this was a particularly stupid thing to do, but in electoral terms, they thought they had the election in the bag and were trying to use that to lever a manifesto commitment to doing something about social care. They could have said nothing and kicked the can down the road, but at least they tried to get something past the radar that could have increased funds for social care.
Of course, it didn’t work. The manifesto fell apart within days, mostly because of this particular issue and the sudden realisation that, unlike the Dilnot Commission recommendations, there was no plan for an upper limit on contributions from an individual. So a millionaire who lived to an old age and developed very high care needs could lose almost all of their assets before the state started picking up the tab, whereas a “lucky” millionaire could be hit by a truck and pass all of their assets after inheritance tax on to their children or other beneficiaries.
So here was have the latest iteration of the social care farce- everyone accepts more money needs to go into the social care system, but no-one is quite sure how to (or perhaps more accurately “who will”) pay for it. Anyone making a suggestion is shot down in flames. Which it is why I guess the Conservative Party manifesto writers thought it was worth a go. It wasn’t.
Which leads us to the tricky question of how we get out of this mess. The Dilnot Commission tried the slow and steady approach, but that led to it being left on the shelf. The Conservative manifesto tried an “under the radar” approach, but that manifestly failed as well. Labour are currently saying they will seek cross-party consensus, which sounds like they won’t exactly hit the ground running if they get the keys to 10 Downing Street- and we know they have other priorities that they said they will go for straight away.
The key issue is that whatever is decided someone will have to end up paying some more and every party is prepared to use this against any other party that tries to suggest changes. Whether it is Labour’s tax bombshell, the death tax or the Conservative dementia tax, there is enough toxic gas around any social care policy to make any significant changes to social care fees almost impossible.
At the same time the current system rumbles on. Local authorities are finding themselves hard pressed as demand rises (indeed, this is the case for both adult and child social care) and the half-hearted attempts of government to introduce intermediate funding are not covering the additional pressures. Worse still, a significant amount of the press seem to link council tax rises with profligacy rather than a response to rising demand and stinging reductions in grant funding.
So what can we do about it?
I know of precisely zero people who see council tax as a long term sustainable way to fund local authorities, especially relating to rising social care costs. Sure, there is some tinkering to maximums, exemptions, re-rating and additional rates that could make some difference, but these most likely mean those in more expensive homes will have to pay more. The system will still be largely regressive be based on a proxy of wealth rather than wealth itself and is unlikely to cover the extra pressures in the long run.
Another option would be to allow councils their own tax raising powers. This would be devolution in action, with some authorities plumping for a local income tax, others going for some sort of land value tax, some a form of the current council tax arrangements etc. etc. There can be no getting away from the idea that many people would end up paying more, but this could be locally controlled with the best and worst ways showing themselves over time. Of course this would lead to the dreaded postcode lottery, but that is the outcome of living in a multi-tiered democracy. The powers could be given to devolved areas first and they could be the testing ground for the new system. But if we are to believe that the significant pressures also largely affect shire counties (with an ageing, asset-and-housing-rich population) then their time must also come for a different but higher level of taxation.
With much recent talk about intergenerational fairness there also needs to be discussion about how any additional payments are structured across age groups. Increases in taxation for young workers might chafe if they are struggling to find affordable housing. It might be worth looking for the margins around what taxations can impact older or more affluent people.
I think one area ripe for looking into is housing wealth- that is, the wealth a person has in their home *after* their mortgage is taken off. So your home-owning 30 something might have a few grand of “wealth” and your outright-home-owning older person will have hundreds of thousands. This isn’t available money and shouldn’t be taxed as such, but could be used as a proxy for payments. So a tax of 0.5% a year of housing wealth would be a couple of hundred pounds a year for a couple who have paid off a few years of their mortgage but will be higher for those who have paid off more. For no-one will it be higher than their actual repayments. Renters won’t be directly affected, so those who are saving to buy a home will be able to do this without being encumbered by further taxes. An amount could be added to pension credit to cover those who are truly asset rich and cash poor, but I think there is a tendency to overstate this group rather than accept that there are many older people who are both cash and asset rich- especially when the one biggest cost of paying for housing is no longer there.
But then there is also the big daddy of them all. You see, if the debate around social care fees is so toxic then the discussion around inheritance is nuclear. Inheritance tax is truly one of the most reviled but misunderstood taxes out there.
Firstly, barely any estates end up paying it. In 2014/15 (the latest stats we have) the estates of just 1 in 25 people who passed away led to an inheritance tax charge. That’s actually the highest it has been since 2007/8. So whilst there can be a genuine argument about inheritance tax the first thing we need to do is reassure the vast majority of people that they won’t end up paying it. One issue is that the current threshold for payment (£325,000 with £100,000 more for residences) is enough to ensnare people who own property in the south east, which can pitch a large amount of the media and political classes against the policy as they will be adversely affected. Another is that people feel they should be able to pass their assets on to their children, which is potentially another way of saying that the distribution of wealth should be entrenched- the children of the rich should also be rich.
Part of this comes from a desire to ensure your own offspring are protected from the vagrancies of the economy and society. But that misses the point- if housing were more affordable and if extra costs in old age were paid through the state, then there wouldn’t be a need for intergenerational insurance against unfortunate circumstances. In any case and for any estate, there would still be at least £325,000 to share between any benefactors in the current system (and for those with high amounts of assets far more) so we have to move away from this idea that inheritance tax is somehow a social ill or a way of destroying the bonds between parents and their adult children.
Indeed, mild changes to inheritance tax- decreasing the asset threshold, increasing the proportion due and removing the recent addition of the £100,000 residence threshold (which raises to £175,000 in 2020/21) could help provide a significant additional income for the treasury to provide social care costs.
But you won’t get anywhere politically by telling people they are being unreasonable. This is true when you look at increasing social care costs or inheritance tax.
One way to try and cover more of the care costs is wider changes the taxation system, like the devolved taxation system I’ve sketched above. Regions or combined authority areas could be freed to set their own taxes- take their own risks and watch what each other are doing to improve their own regimes. But I’ll be clear about one thing, if government does give powers to smaller areas it has to avoid setting limiting conditions that prevent local decision makers from having the final decision. Anything else would just be a pointless exercise in micro-management.
Another way is to offer people a genuine choice in a consultation. No, I’m not recommending a referendum, but something that makes clear the balance between individuals who go on to need support paying more (as in the Conservative manifesto) or higher taxation as a form of collective insurance. It could outline who would pay more under extended inheritance tax or a housing wealth tax, what that would raise and what it would mean for social care fees. It could then offer these, a mixed system with some other tax changes or a “no tax change” option that meant individuals affected would have to pay more than they are currently.
That would allow a short but meaningful public discussion on what we want to see as a country. And if we could keep the pithy titles and constructive ambiguity to a minimum that would also be appreciated.