Capital gains tax rise could hit elderly care home residents hard
In his first Budget as Chancellor, George Osborne announced the Coalition Government’s plans for cutting the budget deficit and encouraging economic growth. He announced that lower spending rather than higher taxes would be the cornerstone of his plan to improve public finances. Headline announcements include:
- The Chancellor will rely on lower spending rather than higher taxes to improve public finances (80:20 split).
- VAT will be increased from 17.5% to 20% from January 2011.
- Capital Gains tax will increase from 18% to 28% for higher rate income tax payers (immediately). Those on low and medium incomes will continue to pay the rate of 18%.
- The earnings link will be restored for basic state pensions from April 2011.
- Child benefit to be frozen for next three years.
- Two-year pay freeze for public sector workers.
- Personal income tax allowance increased by £1,000 in April to £7,475.
- Higher rate income tax remains frozen to 2013/14
Inheritance Tax position
The Inheritance Tax (IHT) threshold has been frozen at £325,000 for the next year delaying previous plans to raise the threshold to £350,000. Currently 40% IHT is paid on an estate over £325,000. However, there is no tax to pay when an estate is left to a spouse or civil partner and on the death of the surviving spouse any unused IHT threshold can be transferred. This can increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000 in 2010-11, depending on the circumstances.
A rise in Capital Gains Tax
Capital Gains Tax will be increased to 28% for higher rate tax payers immediately. Those on low and medium incomes will continue to pay the rate of 18%.
Older people will be among the worst affected by the Capital Gains Tax rise as it is not uncommon for retirement to be funded by the sale of a second home.
An increased number of older people are living in care homes but have not yet sold their previous family home. If they have been living in a care home for three years or more it is deemed to be their primary residence, meaning the family home is treated as a secondary property and Capital Gains Tax is payable when it is sold.
Mike Warburton, the senior tax partner at Grant Thornton has said “The problem is people don’t know how long they are going to be in a care home for, and they are usually very reluctant to sell their home, especially if it holds special memories for them. This seems another example of capital gains tax hitting a group of people through no fault of their own.”
The Liberal Democrats, most notably Vince Cable, the Business Secretary, have argued that the change in the tax is needed to stop speculators from making quick profits. However the Telegraph has recently reported that there will be a growing list of unintended victims of the higher rate. The thousands of nursing home residents that could be hit would join the hundreds of thousands of blue-collar workers who have bought shares in their own companies, and a million buy to let investors who bought properties to fund their retirement.
If you require legal advice in respect of a tax matter contact the specialist private client team at Hine Solicitors.