May's social care pledge could be huge wealth tax

Theresa May holds the Conservative party's election manifesto Image copyright Danny Lawson
Image caption Theresa May's Conservative party manifesto includes a complex shake-up of social care

The fizz in the Conservative Club gin and tonics may taste a little flat this weekend as folks realise that they have just been hit with potentially the biggest new wealth tax of all time.

The Tory manifesto pledge to use accumulated property wealth to fund the escalating price of in-home social care bill will be welcomed by many as a bold attempt to tackle one of the greatest problems of our age. Others will see it as a huge and risky departure from traditional Tory policy.

I merely argue that it has profound implications for the intergenerational economic structure and is likely to trigger a number of unintended and unexpected consequences for financial services and families.

Just how profoundly it will affect you is a lottery with several variables. If you just drop dead one day, you are fine (!) if it happens before you need social care. If your house is worth less than £100,000, you are also fine. The Tory proposal allows you to keep the last £100,000 of your estate.

However, if you live in the South East, have a home worth £500,000 and you need long-term care, you could end up paying 80% of the value of your home to fund it - which may be a big disappointment to your offspring.

Equity withdrawal

There are some enormous questions to answer.

One way to avoid your property wealth being consumed by care bills might be to take equity out of your house ahead of time.

With equity withdrawal, an insurance company will give you a portion of the value of your house now, charge interest on that amount until you die and take the money you owe them out of the eventual sale proceeds of the house.

To take the above example - an insurance company lends you £200,000 against your house aged 65, charges 5% interest a year until your eventual death at 90. You now owe them £200,000 plus 25 years' interest at 5%, which equals £359,000.

If your house price stays flat, that only leaves £141,000 left in equity. If, as the government proposes, you are allowed to keep £100,000, that means your liability or your own social care is only £41,000 rather than £400,000.

Would that arrangement be permitted? If yes - this manifesto pledge could be the start of a gold rush for private equity providers. If no - their death knell.

There are already safeguards to stop this happening when it comes to residential care (for example if you know you have an existing health condition with a poor prognosis, taking out money in this way is seen as "deliberate deprivation" and is prohibited) - but knowing that your house may one day be engulfed by social care bills may encourage more people to take the money earlier.

Who will pay the social care providers while you are still alive and living in your house? Your requirement to fund your own social care is deferred until you die and your house is sold, but the social care providers will need paying in real cash as they deliver it.

The government or some public agency would presumably have to advance the money in the intervening years.

In a way, it's a bit like a student loan arrangement for older people. You don't pay it back until you have the money when you are - er, dead. The numbers involved as we grow older as a society could be colossal - and the administration of it complex to say the least.

Financial advice

The proposal that workers should be entitled to a year off to care for a relative was greeted with some scepticism when first revealed as part of the manifesto. Who can afford to take a year off work when all you will be entitled to is the carers allowance of £62.50 per week?

That calculation is very different when the alternative is paying someone else from the eventual proceeds of your parents estate and thereby burning through the value of a property you might have hoped to inherit.

Another question: could I be paid to be my own parents' carer? That way, the value of the property may be dwindling thanks to care payments over time - but those payments are ending up in my pocket.

Is there a limit to how much I can charge for my services? Who will police it?

It also has far-reaching implications for the pensions and savings industries. Is the financial advice industry ready for complex questions like these?

Sources tell me that working out the detail of this new and far reaching policy will require input from the Department for Work and Pensions, the Treasury, the Cabinet Office, the Department for Culture, Media and Sport and, of course, Number 10.

All of which means it may not happen quickly, but if it does, it promises to be the biggest shake-up of intergenerational wealth redistribution ever seen.

I don't have the answers to these questions. Sharp minds in the financial services industry are poring over the implications and angles as we speak. Meanwhile, families will be assessing the impact on how these changes could affect the fabric of their lives.

No one can say they weren't warned. Back in July of last year, Theresa May promised - in her words - "When it comes to taxes, we'll prioritise not the wealthy, but you. When it comes to opportunity, we won't entrench the advantages of the fortunate few."

The spiralling cost of social care, the strains it was putting on the rest of the NHS and the promise things could only get worse as the population ages collectively made for a formidable nettle to grasp. This is a bold attempt to do that.

It will be very interesting to see how a manifesto pledge to tax wealth rather than income plays on the doorsteps of older middle class voters - and their voting-age children.