‘My wife’s care costs will increase by £40,000 – what do I do?’

Prohibitive care costs can be a concern even for people in the most solid of financial circumstances – particularly if you find yourself having to reorganise your assets at a time that is already emotionally harrowing.

Our reader, George, is 77 and in good health for his age, but his wife Linda, 75, has Parkinson’s disease. For now, Linda receives care at home that costs about £70,000 a year, but she is likely to need to move to a care home within the next six months, which will increase her care bill to roughly £110,000 a year. The couple has substantial income and wealth but also high expenses and many illiquid assets, and George is unsure of how to deal with their change in circumstances.

They have an investment portfolio worth about £2mn held across individual savings accounts (Isas) and general investment accounts, a portfolio of rented properties worth about £2.6mn and some £255,000 in cash. They own their £1.5mn home mortgage-free. Their joint income, including pensions (£140,000), rent from their properties (£130,000) and investment and savings income (£65,000), totals about £335,000 a year before tax, which comes to about £200,000 after tax. Partly because of care fees and large house maintenance costs, they spend about £150,000 a year.

George says: “I think I have more than enough assets to meet likely future care costs, but I would like to give money to my children now to reduce my future inheritance tax (IHT) bill. However, care costs will increase at a significantly faster pace than inflation. I recently heard a terrible story of a 90-year-old woman who had been in a care home for 10 years, but the money ran out and she returned to her daughter, who was 70.” The unpredictability of his wife’s situation has stopped him from giving away “substantial assets” to his children so far, he explains.

“If any tenant were to leave, I would sell the rented properties to improve personal liquidity. But our tenants have stayed for years and years and I am not prepared to evict them. Maintenance of the properties has become more stressful over recent years and the rents I charge are below market levels,” George adds. 

Overall, this could result in the couple needing to draw more money from their portfolio and potentially reduce its risk profile; work that George has already started. “Since my wife’s Parkinson’s diagnosis, I have significantly reduced my appetite for risk by increasingly buying income-paying investment trusts and reducing holdings in individual shares where performance has been bad. Perhaps Berkshire Hathaway (US:BRK.B), which is my big bet on America, should also go as it produces no income,” George muses.

The majority of George’s portfolio is in investment trusts, with UK equity income play Edinburgh Investment Trust (EDIN) as his biggest holding. George does not want to hold government bonds and prefers focusing on income-generating trusts such as Supermarket Income Reit (SUPR), whose dividends tend to grow over time.

But combined with his investments in physical property, that does leave him with high exposure to the asset class. To describe his risk profile, he says: “I don’t have a problem with assets going down 10 per cent or so, but during Covid, when my portfolio was 20 per cent under water, it did cause some stress.”

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES

Ian Dyall, head of estate planning at Evelyn Partners, says:

Even with the predicted increase in the cost of care, it looks as though your current income will cover the care fees and the rest of your current expenditure. It is more difficult to predict whether this will keep applying going forward or whether you will need to use your investments.

Our starting point would usually be to use cash flow modelling to identify how much money a client needs to retain and what they can afford to give away or spend. You could undertake a more basic form of such analysis yourself, although a lot of the assumptions on things like inflation and investment growth need research.

As for IHT, the fundamental challenge is: how do you reduce the taxable estate while maintaining access to the money you need to avoid leaving yourself financially vulnerable? There are some assets you can continue to hold but don’t form part of your estate, most notably pensions and assets that qualify for agricultural or business relief. To qualify for business relief, you would need to invest in unlisted shares or certain Aim shares and hold them for two years. But they tend to be more volatile, so may not suit your appetite for risk. Both pensions and business relief have been identified as possible areas for change in the upcoming Budget, but preserving pensions would be a reversible decision with no damage done if the legislation changes.

It is admirable that you wish to continue to provide affordable and reliable housing for your loyal tenants, but consider whether you would be prepared to increase the rent or sell a property should your ongoing expenditure increase significantly more than predicted. If so, the properties could be a useful safety net, allowing you to be more bullish with your gifting to mitigate IHT.

You could also gift a property to your children, perhaps on the understanding that they don’t sell it or increase rents for a certain timeframe. That way, you could continue to look after your tenants but decrease your IHT liability.

But if you do gift the properties, or any other asset that is liable to capital gains tax (CGT), you need to consider whether you will live seven years after making the gift. As things stand, any capital gains are exempt on death. Selling or gifting the properties would trigger a CGT liability. This may prove beneficial from an IHT perspective if you live for another seven years, but if you don’t, you may end up paying both IHT and CGT.

You could also look at certain types of trusts, which allow you to gift assets that are fully outside the taxable estate after seven years, while retaining some form of access to the money. For example, with a discounted gift trust, you could remove a lump sum from the estate but maintain a series of fixed annual repayments for the rest of your life (perhaps 4 or 5 per cent of the amount gifted).

Once you have an idea of how much you can safely gift, a combination of outright gifts and gifts to different types of trust from both spouses should help reduce the overall IHT liability while maintaining sufficient access to the money. Gifts into trust are generally limited in size to the nil-rate band (£325,000) from each person in any seven-year period, while outright gifts are unlimited.

If you have any extra income, you can also use the “normal expenditure from income” exemption. You can gift away the excess income on a regular basis and those gifts are immediately outside the estate for IHT, without waiting seven years. To qualify, the gifts must be out of income rather than capital, must be regular and can’t affect your standard of living.

Tom Holliday, investment director at Tyndall Investment Management, says:

Given that you are in good health and Linda’s care costs are rising, you need to grow the capital and income over the medium term. Stocks have the potential to do this, so I would keep about half of the portfolio in stocks. With a sizeable cash float of £255,000, or roughly 4 per cent of assets, you have sufficient funds to cover any short-term funding requirements.

You have 65 per cent of your asset base invested in property, which is a sizeable chunk. Based on performance and income over five years, you could sell Personal Assets (PNL), Sequoia Economic Infrastructure (SEQI), STS Global Income and Growth (STS), Scottish American (SAIN), RIT Capital Partners (RCP), Mobico (MCG), Sigmaroc (SRC), BlackRock Sustainable American (BRSA) and Supermarket Income (SUPR), raising almost £260,000. You could reinvest this money in funds such as Biopharma Credit (BPCR), VH Global Sustainable Energy Opportunities (GSEO), Real Estate Credit Investments (RECI) and BBGI Global Infrastructure (BBGI), increasing the average yield to over 7.5 per cent.

Real Estate Credit holds a short-dated loan portfolio secured against property, managed by Cheyne Capital-Biopharma, which makes loans to drug developers secured against intellectual property. Victory Hill [VH] brings in hydro and solar assets in Australia, Brazil and Europe, while BBGI infrastructure invests in core infrastructure at the lower end of the risk spectrum.

These changes would dilute your property exposure. But you should also think about the physical portfolio. Although your properties generate attractive levels of income, this is unlikely to be the true yield due to the hidden costs involved, such as maintenance costs. In addition, the management requires time and effort, and as you become older this may become more challenging.

I would be minded to sell some of the investment properties and reinvest perhaps into the funds mentioned above as well as some fixed income. CVC income and Growth (CVCG), which invests in senior floating-rate notes loans and has an 8 per cent yield, is an option.

I would suggest a short-dated below-par gilt for your cash. The benefit of buying a gilt below par is that the gain is a capital gain, and gilts are exempt from CGT, while you have to pay income tax on the interest received by the bank – although Premium Bond wins are tax-free.

Finally, I would consider selling the SPDR S&P US Dividend Aristocrats ETF (USDV) and favour keeping Berkshire Hathaway (US:BRK.B). The proceeds could be reinvested in a quality long-term investment trust such as Lindsell Train (LTI), which yields over 6 per cent. 

You could also add some exposure to VCTs to reclaim some of your income tax and receive a tax-free income of more than 4 per cent. You would need to stay invested for five years in order to claim the relief, but it would reduce your property bias and increase your after-tax income meaningfully. Albion VCT (AAVC) is worth looking at.

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