The hidden flaws in a ‘death tax’ to pay for a national care service

Andy Burnham has been warned that a so-called “death tax” would be unlikely to raise enough money to fund an £18.5bn National Care Service. The Prime Minister gave the strongest hint yet on Wednesday that he would have to put up taxes to fund a new National Care Service when he said the public should be prepared for “difficult decisions”. While no decisions on funding will be made until Baroness Casey completes her review on social care next year, one option Burnham backed before he entered Downing Street was a new “national care levy” of 10 per cent imposed on people’s homes when they died, which critics have branded a “death tax”. Shorts Under this proposal, the 10 per cent levy would replace the existing inheritance tax rate of 40 per cent on estates above a threshold, with certain allowances and exemptions in place. The plans are controversial because inheritance tax is currently only paid on 6 per cent of estates, while the 10 per cent rate would be universal, meaning hundreds of thousands more families a year would be liable and be faced with burdensome administration. But experts have warned scrapping inheritance tax and introducing a new levy would also be revenue neutral at best, leaving no more money to fund social care without cuts to other services. It would potentially raise around £9bn a year, which is only half of the £18.5bn the Health Foundation think-tank calculates would be needed to fund a National Care Service for everyone in England who needs social care, free at the point of use. Stuart Adam, a tax expert at the Institute for Fiscal Studies, suggested that a 10 per cent levy could raise up to £9bn a year, but that this figure could also end up being a lot less because it did not take into account behavioural responses such as people handing over their homes to their children to avoid paying the tax. He stressed that the figures were only hypothetical calculations because they were based on a policy that had not been formally proposed. Adam said the HMRC estimates that each one percentage point increase in the current 40 per cent inheritance tax rate raises around £300 million. On that basis, a 10 per cent levy would raise £3bn from those estates already subject to tax.. He also pointed to HMRC estimates showing that exempting estates below the £325,000 nil-rate band costs around £24 billion in foregone revenue, based on the current 40 per cent tax rate and before accounting for behavioural changes. Adam argued that applying a 10 per cent tax to those currently exempt estates would raise roughly a quarter of that amount, or around £6 billion. Combined, he said, those two measures could theoretically raise about £9 billion. Adam said: “This is roughly the same amount as inheritance tax currently raises, so it would be revenue neutral and not very good for funding social care. “That is even before any behavioural response and not taking into account the nil rate band for people’s homes and bequests to spouses.” He added: “Only 6 per cent of estates are currently subject to inheritance tax. “So if you are talking about a new 10 per cent tax with no threshold, everyone who died would owe a tax. That is an extra administrative and record-keeping burden. I would be quite surprised if there was a tax on estates with no threshold at all.” Setting out early plans to speed up social care reform on Wednesday, the Prime Minister said it would be “possible from existing budgets to do much more” but also strongly hinted that tax rises would be on the cards. He said: “I think firstly you have to do more with what you’ve got, but I think Louise [Casey] indicated some of what we would want to do in the fuller sense will require difficult decisions. “But we will be honest with people about those, we will put them before the country at the right time and we will hopefully proceed with people’s consent.” Burnham’s comments have sparked suggestions that he may seek a fresh mandate, in Labour’s next general election manifesto, for tax rises to pay for social care. The Health Foundation has also calculated that a narrower model of reform than a full National Care Service, such as providing at home personal care to people who needed it along the lines of the policy in Scotland, would cost around £6.5bn a year. This could in theory be paid for by a new 10 per cent levy but it would stop short of Burnham’s pledge for a fully fledged National Care Service, which would extend to things like accommodation in care homes. Burnham may try to avoid a controversial “death tax” and choose other new levies or rises on existing taxes. The Daily Telegraph reported that civil servants were looking at a 1.8 per cent levy on incomes over £6,240 for people over 34. However Casey on Wednesday rebuffed suggestions of a “whole new tax” to fund a new care service. She told Radio 4’s Today programme: “Incidentally … [the public are] already paying for it. So this idea that somehow somebody’s going to come along and say: ‘Hello, here’s a whole new service and a whole new tax,’ is just kind of cloud cuckoo land.”