Inheritance Tax and Care Home Fees UK: How Care Costs Affect the IHT Estate (2026)
Care home fees reduce the IHT estate naturally — every pound spent on care is a pound less subject to 40% IHT. Outstanding care fees at death are a deductible estate liability. The family home is excluded from the local authority means test while a spouse still lives there. A life interest trust in the will (IPDI) can preserve both the RNRB and protect the home share from care means testing.
| Care/IHT Scenario | IHT Effect | Means Test Effect | Planning Tool |
|---|---|---|---|
| Care fees paid during life (from capital) | Reduces estate — IHT saving at 40% | Self-funding until capital below £23,250 | Natural estate reduction — no planning needed |
| Outstanding care fees owed at death | Deductible liability (s5(3) IHTA) | N/A — debt settled from estate | Include on IHT400; deduct from estate |
| Care home DPA — local authority charge on home | DPA debt deductible from estate | Home remains; DPA defers means test reckoning | DPA avoids forced sale; DPA debt deducted for IHT |
| Home — spouse still lives there | In estate at death of survivor at full value | Excluded from means test while spouse lives there | Tenants in common + IPDI trust preserves RNRB |
| Transfer property to children (means test avoidance) | PET — 7yr IHT clock from date of gift | Deliberate deprivation — notional capital for LA | Both effects must be weighed. Seek specialist advice. |
| Life interest trust (IPDI) in will | Deceased's share in IPDI — in survivor's estate; RNRB available if children are remaindermen | Deceased's trust share may be excluded from survivor's means test | Tenants in common + IPDI (Property Trust Will) |
| Discretionary trust in will (home in trust) | Home not in survivor's estate; but RNRB LOST | Trust share may be excluded from survivor's means test | Avoids RNRB loss — use IPDI not discretionary trust |
2026/27. Local authority means test capital threshold: £23,250 (England). DPA: care home deferred payment agreement — local authority charge on property. IPDI: Immediate Post-Death Interest trust (s49A IHTA 1984) — RNRB available if remainder to direct descendants. Discretionary trust: RNRB lost if home in trust. Means test rules: Social Care Act 2014 (England). Scottish means test is different.
Care Home Fees and IHT: Complete Guide
How care home fees reduce the IHT estate
The most direct effect of care home fees on inheritance tax is estate reduction through spending. The average care home fee in England is approximately £35,000–£65,000 per year, depending on location and level of care. Nursing home fees (with nursing care) are higher. Each year of care home fees that is paid from the estate reduces the capital that will eventually be subject to IHT at 40%. Example: an estate of £900,000 before care. After 3 years of care at £55,000 per year = £165,000 spent on fees. Estate at death = £735,000. IHT saving on the estate reduction (at 40%) = £66,000. This is not IHT planning — it is the natural consequence of funding care from capital. It is, however, a real reduction in the IHT liability that beneficiaries might face. Importantly, spending on care home fees is a legitimate, necessary expenditure — HMRC has no power to add care fees back to the estate for IHT purposes. They are a genuine liability that has been paid.
Outstanding care fees at death — a deductible estate liability
Where care home fees are owed but not yet paid at the date of death, the outstanding debt is a deductible liability from the IHT estate (s5(3) IHTA 1984). This is because IHT is charged on the net estate — the gross assets minus liabilities. Accrued but unpaid care home fees are a genuine debt of the estate. Example: the person dies on 15 June 2026. The care home invoiced for June (£5,000) but it has not been paid. The £5,000 is deducted from the estate as a liability. Similarly: a care home deferred payment agreement (DPA) creates a debt to the local authority that accumulates over time. Where the DPA debt has accrued at the date of death, the full outstanding DPA balance is deductible from the IHT estate as a liability. The property on which the DPA is secured remains in the estate at its full open market value — the DPA creates a separate liability deduction, not a reduction in the property value.
Local authority means test and deliberate deprivation — separate from IHT
The local authority means test (for social care funding in England) is a separate system from HMRC inheritance tax. Capital threshold: a person in England must contribute to their own care costs if their total capital exceeds £23,250 (2026 threshold). Above this threshold, they are self-funding. Below this threshold, the local authority contributes. Property: the family home is excluded from the means test capital assessment where a spouse, civil partner, or certain dependants still lives there. Once the last person leaves the property (e.g., moves into care), the local authority includes the property in the capital assessment. Deliberate deprivation (means test): where a person has transferred assets primarily to reduce their capital below the means test threshold, the local authority can treat the transferred assets as 'notional capital' — continuing to include them in the means test assessment as if the transfer had not occurred. Important IHT/means test distinction: deliberate deprivation is a means test concept, not an IHT concept. HMRC does not specifically target transfers made to avoid care home fees for IHT purposes — the 7-year PET rules apply in the normal way regardless of the motive. A transfer of assets to reduce the means test (notional capital for care) can simultaneously be a valid PET for IHT (starting the 7-year clock to become IHT-free).
The family home — property protection, care fees, and IHT
The family home creates the biggest overlap between care home fee planning and IHT planning. The concerns: (1) Will the local authority take the home to pay care fees? (2) Will the home be subject to IHT on the surviving spouse's death? These are addressed differently. Care home fee concern: the home is excluded from the means test while a spouse or qualifying dependent lives there. On the first death, if the home passes to the survivor and the survivor then needs care, the home is excluded while they remain in the home. If the survivor moves into a care home, the property is no longer their main home and the local authority may include it in the capital assessment. IHT concern: the home is in the estate at full value on the survivor's death. The RNRB (up to £175,000 per person, £350,000 combined) provides relief if the home passes to direct descendants. Planning: a tenants-in-common structure and a life interest trust in the will (IPDI — s49A IHTA) allows: (a) the surviving spouse to continue living in the home; (b) the home to be partially outside the survivor's estate for means test purposes (only the survivor's share is assessed); (c) the RNRB to be potentially preserved for the second death (where the home passes to children as remaindermen under the IPDI trust). This combination — tenants in common + life interest trust in the first-to-die spouse's will — is one of the most common care/IHT planning tools for married home-owners.
Property protection trusts and life interest trusts for care and IHT
A property protection trust (also called a property will trust or life interest trust — correctly, a Property Trust Will) is a will provision that: (1) Converts the property from joint tenants to tenants in common (done by a notice of severance during lifetime, or addressed in the will); (2) On the first death: the deceased's share passes into a life interest trust in the will. The surviving spouse or civil partner has the right to live in the property for life (the life interest); (3) On the survivor's death: the deceased's share of the property passes to the children (the remaindermen) — outside the survivor's estate for IHT purposes (because it was in the first-to-die's trust, not the survivor's estate); (4) Local authority means test: the survivor's share of the property IS assessed (it is directly owned). The first-to-die's share in the trust may be excluded from the means test — subject to the terms of the trust and local authority assessment. The IHT interaction: a life interest trust created in the will is an IPDI trust (s49A IHTA 1984) where: (a) the property in the IPDI is treated as owned by the life tenant (the survivor) for IHT — it IS in the survivor's estate; (b) the RNRB (up to £175,000) can apply to the property on the survivor's death if the remaindermen are direct descendants. This makes the IPDI trust more IHT-efficient than a discretionary trust (which would lose the RNRB) for properties left to children.
Frequently Asked Questions
Do care home fees reduce the inheritance tax estate?
Yes — care home fees paid during the person's lifetime reduce the estate that is eventually subject to IHT. Each pound spent on care fees is a pound less in the estate. Outstanding care fees owed at the date of death are also deductible from the IHT estate as a liability (s5(3) IHTA 1984). HMRC cannot add care fees back to the estate — they are a genuine expense. A care home deferred payment agreement (DPA) debt is also deductible from the estate as a liability at the date of death.
Can the local authority take the family home to pay care fees?
The local authority means test for care funding (England) excludes the family home from the capital assessment where a spouse, civil partner, or qualifying dependant still lives there. If both spouses move into care, the property may be included in both means test assessments. A deferred payment agreement (DPA) avoids selling the home during the care recipient's lifetime — the local authority places a charge on the property and recoups its costs from the estate after death. The DPA debt is deductible from the IHT estate as a liability.
Is transferring property before going into a care home a way to avoid care fees?
Transferring property primarily to reduce the local authority means test capital is 'deliberate deprivation' — the local authority can treat the transferred assets as 'notional capital' and continue assessing care fees as if the transfer had not occurred. This is separate from IHT: a transfer to a child (a PET — s3A IHTA) starts the 7-year IHT clock regardless of the motive. But the means test avoidance may not work — local authorities have broad powers to look back at deliberate deprivation. Both effects must be considered.
What is a property protection trust and how does it help with care fees and IHT?
A property protection trust (life interest trust in the will — correctly, a Property Trust Will) converts the home to tenants in common and places the first-to-die spouse's share into a life interest trust on the first death. The survivor lives in the whole property for life; their own share is included in the means test (if in care). The deceased's share in the trust may be excluded from the means test. For IHT: a correctly drafted life interest trust is an IPDI trust (s49A IHTA 1984) — the property is in the survivor's estate but the RNRB (up to £175,000) can apply if children are remaindermen. A discretionary trust (not an IPDI) would lose the RNRB.
Is the care home DPA debt deductible from the inheritance tax estate?
Yes — a care home deferred payment agreement (DPA) creates a liability of the estate to the local authority for accumulated care costs. The outstanding DPA balance at the date of death is a genuine debt owed by the estate and is deductible from the IHT estate (s5(3) IHTA 1984). The property on which the DPA charge is secured remains in the estate at market value; the DPA balance is deducted separately as a liability.
Protect the Home From Both Care Fees and IHT — Update the Will
A Property Trust Will (tenants in common + life interest trust for the surviving spouse) provides the most effective combined protection: the surviving spouse retains full use of the home; the first-to-die's share may be protected from the means test; the RNRB is preserved for the second death. WillSafe will kits from £39.99.
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