Care Home Fees and Inheritance Tax UK (2026): IHT Deduction, Property & Planning

Care home fees that are owed but unpaid at the date of death are deductible from the estate for IHT purposes — they reduce the value of the taxable estate. The legal basis is IHTA 1984 s.5(5) (now re-enacted in IHTA 1984 s.5), which provides that in determining the value of a person's estate immediately before death, their liabilities are taken into account. A care home debt is an ordinary unsecured liability: the care home or local authority can prove this debt in the estate administration, and the executor must pay it before distributing anything to beneficiaries. For IHT: the outstanding care home fee balance at the date of death reduces the gross estate by that amount. For example, if the gross estate is £600,000 and outstanding care home fees amount to £20,000, the net estate for IHT is £580,000 — this could meaningfully affect whether the estate falls below or above the IHT threshold. Important restriction: HMRC scrutinises debts that are not genuine arm's-length liabilities. A care home debt that the family arranged with the intention of reducing IHT (for example, an artificial arrangement with a connected person) would be challenged. Genuine unpaid care home bills from registered care providers — including local authority fee contributions — are straightforwardly deductible. Local authority top-up fee obligations: where the estate is responsible for local authority top-up payments (additional fees above the local authority rate), any arrears at death are also deductible estate liabilities.

Yes — the family home can still qualify for the Residence Nil-Rate Band (RNRB) even if the deceased was living in a care home at the time of death, provided the RNRB conditions are met: (1) The property must have been the deceased's main or principal private residence at some point during their ownership. Moving into a care home does not disqualify the property from the RNRB — the test is whether the deceased ever lived there as their main home, not whether they were living there at death; (2) The property must be 'closely inherited' — left to a direct lineal descendant (child, grandchild, step-child, or adopted child) — under the will or intestacy rules; (3) The property need not be retained until death: if the family home was sold to fund care fees (a common scenario), the 'downsizing addition' can apply. Under IHTA 1984 s.8FA, if the deceased sold or downsized from their home on or after 08 July 2015 (and the sale was at least partly to fund care), the estate may still claim the RNRB (or a portion of it) provided that assets of equivalent value are closely inherited. This is called the 'brought-forward allowance' or 'downsizing addition'; (4) Practical example: Mrs Smith lives in her home worth £400,000 until she enters a care home in 2023. Her home is sold for £400,000 to fund care. She dies in 2026. Her estate has savings of £300,000 (remaining after care fees). Under the downsizing rules, her estate may still claim the RNRB (£175,000) in respect of the home she sold — reducing the taxable estate — provided her children are residuary beneficiaries. This requires the executors to submit a Downsizing Statement to HMRC with the IHT return.

Many families confuse two entirely separate 'deliberate deprivation' rules that operate under different legal regimes — and making a gift that avoids one may not avoid the other: (1) Local authority means test deliberate deprivation (Care Act 2014 and the Care and Support (Charging and Assessment of Resources) Regulations 2014): if a person deliberately deprives themselves of assets to avoid care home fees — for example, by gifting their home to children — the local authority can treat the gifted asset as if it were still in the person's possession when assessing their ability to pay for care. There is no fixed time limit for this rule — a gift made years or decades before care was needed can still be challenged if the local authority concludes that avoiding care fees was a 'significant' motivation. The local authority also has a right of action against the transferee (the person who received the asset) under Care Act 2014 s.70; (2) IHT deliberate deprivation (Gift with Reservation of Benefit — IHTA 1984 s.102): for IHT, the key concern is whether the donor continued to benefit from the asset after making the gift. If a parent gives their home to their children but continues to live there rent-free, it is a 'gift with reservation of benefit' — the home remains in the parent's taxable estate for IHT regardless of when the gift was made. However, paying a full market rent to the children after the gift eliminates the reservation. If the parent moves to a care home and ceases to occupy the property, the reservation ends and the 7-year clock starts for the Potentially Exempt Transfer (PET) rules; (3) The two rules are independent: a gift that successfully avoids IHT (parent gives home away, pays market rent, survives 7 years) may still be challenged by the local authority under the means test deliberate deprivation rule. Seeking legal advice before making gifts for either purpose is essential.

Property protection trusts (PPTs) — sometimes marketed as 'Asset Protection Trusts' or 'Property Trusts' — are commonly promoted as a way to reduce both care home fees and inheritance tax. The reality is more nuanced: (1) What a property protection trust is: typically, a married couple or civil partners sever the joint tenancy of their home, converting it to a tenancy in common. On the first death, the deceased's share of the property passes into a life interest trust in their will. The surviving spouse has the right to live in the property for life but does not own the deceased's share outright — that share is held in trust for the children or other ultimate beneficiaries; (2) IHT planning benefit: the main IHT benefit of a PPT is to preserve the use of the first-to-die's NRB. Without a PPT, the property passes to the surviving spouse (using the spouse exemption) — the survivor's estate then includes the full property value. With a PPT, the deceased's share passes into trust (using their NRB and RNRB), meaning the survivor's estate is smaller. However, this NRB planning can usually be achieved equally effectively using a deed of variation after the first death, or by claiming the transferable NRB after the second death — making the PPT less urgently necessary for IHT than some promoters suggest; (3) Care home fee planning: the PPT structure does not protect the surviving spouse's share of the property from local authority means-testing — the surviving spouse still owns 50% of the property, and the local authority will take this into account. The deceased's 50% share in trust is the subject of the life interest trust and not straightforwardly available for care fee contribution, but local authorities may scrutinise the arrangement; (4) Deliberate deprivation risk: if the PPT was set up with a significant motive to avoid care fees, the local authority may challenge it under deliberate deprivation rules even years later.

Where a married couple owns a property jointly and one spouse moves into a care home while the other continues to live in the property, the IHT treatment is as follows: (1) First death of the spouse in care: if the spouse in care dies first, their half-share of the property forms part of their estate for IHT. However, if the property passes to the surviving spouse (whether by survivorship as joint tenants, or under the will/intestacy), it qualifies for the 100% IHT spousal exemption — no IHT on the first death regardless of value. The property also satisfies the RNRB qualifying residence condition (the care home spouse lived there as their main home before moving into care); (2) Transfer of NRB: on the first death, if the entire estate passes to the surviving spouse (and is exempt from IHT), the deceased spouse's NRB and RNRB are both fully preserved and can be transferred to the survivor's estate (using HMRC Forms IHT402 and IHT435); (3) Second death (surviving spouse who remained in the property): on the second death, the property is part of the estate at full value. The combined NRB (up to £650,000 including both transferred NRBs) and the combined RNRB (up to £350,000) can shelter a joint estate of up to £1,000,000 from IHT — if the property passes to direct descendants; (4) Local authority top-up for the care home spouse: fees owed to the care home or local authority by the care home resident at the time of death are deductible estate liabilities for IHT on that spouse's estate. If the survivor pays these from the joint estate after the first death, they may also be deductible from the survivor's estate as a liability arising from the first estate; (5) Long-term care costs depleting the estate: if care fees have reduced the combined estate substantially before the second death, the IHT liability may be lower as a result — but the family receives less.