Inheritance Tax: Could it be used to fund long-term care?

In debate on long-term care funding, a number of stakeholders have in recent years advocated a new inheritance tax to pay for an increase in social care spending and the abolishment of means-testing. What are the pros and cons of such an approach?

While the idea of a new inheritance tax to fund care and support has received significant coverage in policy debate, there has been less detailed analysis of the benefits and challenges to this approach, besides the obvious problems of convincing a hostile public.

This report addresses this gap by examining in detail key policy design choices for this model, and some of the arguments for and against using a new inheritance tax to fund universal free care and support in England and Wales.

As noted by supporters, a new inheritance tax for care and support would be relatively simple and communicable, as well as administratively feasible given the scope to scale up the existing probate system.

However, problems with this approach include: significant uncertainty as to what extent households would respond to the new tax by shifting wealth and reducing their liabilities; issues around closely tying social care revenue streams to fluctuations in house prices; and, the so-called carer penalty  the imposition of the tax on the estates of those who have only relied on informal care, frequently provided by carers who have foregone earnings to do so.

The paper also examines variations on the inheritance model, including: providing exemptions for recipients of informal care; directing inheritance tax revenue to a social insurance fund; and, the use of an estate-charge, rather than a tax, to fund care and support.

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