Inheritance Tax and Care Home Fees UK: Means Test, Deliberate Deprivation, IHT Planning (2026)
Care home fees and IHT interact in ways that catch many families off guard. The local authority means test, deliberate deprivation rules, and the RNRB downsizing addition all need careful planning — and the IHT regime and the LA regime operate independently.
| Scenario | LA Means Test Position | IHT Position | Notes |
|---|---|---|---|
| Property owned; goes into care; spouse still lives in home | Home DISREGARDED — mandatory disregard; spouse is protected person; home NOT included in means test | Home in estate on death; RNRB applies if home passes to direct descendants; no IHT on transfer to spouse (s18 IHTA) | Mandatory disregard: home excluded if spouse/CP/dependent relative occupies; no care fee charge on home while spouse lives there |
| Property owned; goes into care alone; no protected person in home | Home INCLUDED in means test; LA will pursue 12-week disregard initially; then Deferred Payment Agreement (DPA) or property sold to fund care | If property sold during lifetime for care: RNRB downsizing addition may apply (ss8FA-8FE IHTA) if sold post-8 July 2015; proceeds become part of estate; IHT on residual estate | 12-week disregard (12 weeks of permanent care): home ignored for first 12 weeks; then included; DPA allows deferral until death or sale |
| Property gifted to children 15 years ago; now needs care | Deliberate deprivation MAY apply if LA finds care was foreseeable at time of gift; but 15yr gap makes it very hard for LA to challenge; factual assessment | PET 15 years ago — outside 7yr window; fully IHT-exempt; gift successful for IHT | IHT and LA operate independently: gift successful for IHT does NOT mean LA cannot challenge for care; but 15yr gap makes deliberate deprivation very difficult |
| Property gifted to children last year; now needs care immediately | Deliberate deprivation VERY LIKELY — care foreseeable; LA will include property value in means test; child pursued for recovery | PET 1 year ago — within 7yr window; if donor dies within 7yr, IHT applies; gift only effective for IHT at 7+ years | Worst case: LA includes gift in means test AND IHT applies if donor dies within 7yr; double exposure |
| Savings spent on care fees (not gifted) | Savings are counted in means test as spent; no deliberate deprivation (bona fide spending) | Estate depleted by genuine care fee expenditure; reduced IHT on smaller residual estate; no tax issue | Genuine spending on care = acceptable; reduces IHT estate legitimately; no deliberate deprivation; natural depletion |
| Home sold for care in 2022; other estate £400k at death; passes to children | Home was used for self-funding; no LA claim on gifted property (property was sold, not gifted) | No home in estate; RNRB downsizing addition applies (ss8FA-8FE IHTA): former home RNRB = £175k; no current home RNRB = £0; downsizing addition = £175k; threshold = £500k; estate £400k = IHT £0 if £400k passes to children | Home sold for care post-8 July 2015 → RNRB downsizing addition applies; saves up to £70k IHT |
LA means test (England): Care Act 2014; Care and Support (Charging and Assessment of Resources) Regulations 2014 (CSSR 2014). Capital threshold: £23,250 (self-funder above; LA contributes below). Lower capital limit: £14,250. Mandatory disregard: home occupied by spouse/CP, relative 65+, incapacitated relative, child under 16, carer who gave up their home. 12-week property disregard: home ignored for first 12 weeks of permanent residential care. DPA: Deferred Payment Agreement — LA pays fees; charge on property; recovered on sale. Deliberate deprivation: CSSR Reg 22 — 'significant operative purpose' was to avoid care fees; notional capital included; no time limit. IHT: PET (s3A IHTA 1984) — 7yr clock; IHT-free if 7yr survived; taper s7(4) years 3-7. Two regimes INDEPENDENT: IHT-effective PET (7yr survived) can still be LA deliberate deprivation. RNRB downsizing addition: ss8FA-8FE IHTA 1984 — home sold post-8 July 2015; claim form LD1 with IHT400; up to £175k RNRB against other assets. Scotland: different care funding system; same IHT rules.
IHT and Care Home Fees: Complete Guide
The local authority means test — what counts as capital
In England, the local authority (LA) carries out a financial assessment to determine the person's contribution to residential care costs. The capital assessment rules (as set out in the Care Act 2014 and the Care and Support (Charging and Assessment of Resources) Regulations 2014 — CSSR 2014) include: (a) savings and bank accounts; (b) investments (shares, ISAs, bonds); (c) the value of the family home — UNLESS a protected person still lives there. The LA is required to DISREGARD the family home in the means test if it is occupied by: the person's spouse or civil partner; a relative or member of the family who is 65 or over (or incapacitated); a child under 16 who the person is liable to maintain; or a person who gave up their own home to care for the person before they moved into care. The current capital threshold for England is £23,250: above this, the person is a self-funder and pays the full care home fees; below £23,250, the LA contributes a portion; below the lower threshold (currently £14,250), the LA pays almost the full cost. 12-week property disregard: even where the home is included in the means test, for the first 12 weeks of permanent residential care the property value is disregarded. This gives the family time to explore options without an immediate demand to sell the home. Deferred Payment Agreement (DPA): after the 12-week disregard, the LA may offer a DPA — the LA pays care fees and registers a charge on the property; the charge is recovered when the property is eventually sold (on death or by choice). Interest is charged on the deferred amount.
Deliberate deprivation of assets — what the local authority can do
If the LA believes a person has deliberately given away assets (including their home, savings, or investments) to avoid paying care home fees, it can treat the gifted asset as if the person still owns it — a 'notional capital' assessment. The legal basis: Care Act 2014 s17(3) and Reg 22 CSSR 2014 (England); the principle is also reflected in CRAG (Charging for Residential Accommodation Guide) guidance. The test: the LA must find that a 'significant operative purpose' of the disposal was to avoid paying care home fees. The LA does not need to prove it was the ONLY reason; it does not need to prove the person KNEW they would need care at the time. However, the LA must weigh the evidence fairly — other genuine reasons for the gift (family planning, IHT planning, family need) are relevant. Key factors: (1) timing — a gift made 20 years ago when the person was fit and healthy is very hard to challenge as deliberate deprivation; a gift made shortly before or after a care need arose is much more vulnerable; (2) the person's awareness — did they know at the time that they might need care? A GP record of deteriorating health around the time of the gift is a red flag; (3) the presence of other purposes — a gift explained primarily by IHT planning, family need, or financial advice (not care fee avoidance) is harder for the LA to challenge. Important: there is NO statutory time limit on the LA's investigation. A gift made 10 or 15 years ago can still be challenged if the LA can show care was foreseeable at the time. Unlike IHT (where a 7-year survived PET is permanently exempt), the LA deliberate deprivation rules have no expiry.
How care home fees naturally reduce the estate for IHT
Care home costs in England average approximately £1,100 per week for nursing care (£57,200 per year) and £800-£1,000 per week for residential care (£41,600-£52,000 per year). A person who lives in residential care for 3-5 years before death will spend £125,000-£286,000 on care fees — substantially reducing the estate. This natural depletion of the estate REDUCES the IHT liability: if the estate is £1m before care, and £280,000 is genuinely spent on care, the estate at death = £720,000; IHT is calculated on the smaller estate. No IHT planning issues arise from genuine spending on care: the money was used for the legitimate purpose of funding the person's care. The executors simply report the estate at the date of death value (after care fees have been paid). Contrast with deliberate deprivation: spending money on care = genuine depletion (no LA or IHT issues); gifting money to avoid spending it on care = potential deliberate deprivation. The critical principle: the care home means test penalises deliberate avoidance, not genuine spending.
The RNRB downsizing addition when the home is sold for care
A frequently overlooked IHT opportunity: when the family home is sold to fund care home fees (after 8 July 2015 — the Summer Budget announcement date), and the proceeds are spent on care (leaving the estate reduced but with non-property assets passing to children), the executors may claim the RNRB downsizing addition (ss8FA-8FE IHTA 1984). The downsizing addition allows the RNRB (up to £175,000) to be claimed against other estate assets — savings, investments, remaining cash — even though the home is no longer in the estate. Conditions: (1) the home was sold on or after 8 July 2015; (2) the estate includes a lesser (or no) qualifying residential interest at death; (3) at least a qualifying amount of the estate passes to direct descendants (children, grandchildren). The key planning point: ensure the will directs residual estate assets to direct descendants (not just to the surviving spouse or to a discretionary trust); if assets pass to a discretionary trust, the RNRB downsizing addition is also lost. Claim: HMRC form LD1 submitted with IHT400; executors must actively claim it — it is NOT automatic. Saving: up to £70,000 per person in IHT. Combined with the transferred downsizing addition (s8FE IHTA) for a surviving spouse who also sold their home for care, the saving can be up to £140,000.
IHT vs LA — independent regimes; why a gift can succeed for one and fail for the other
The two principal traps for people who gift assets before needing care are: (1) IHT 7-year rule (PET — s3A IHTA 1984): the gift is only free of IHT if the donor survives 7 years; (2) LA deliberate deprivation (Care Act 2014 / CSSR 2014): the LA can include the gift in the means test if care was foreseeable at the time of the gift. Crucially: these are INDEPENDENT regimes. A gift that succeeds for IHT (donor survived 7 years) may still fail for LA means testing (LA challenges deliberate deprivation). A gift that fails for IHT (donor died within 7 years) may escape LA means testing (gift was made 10 years before any care need arose). The practical implication: there is no single legal mechanism that removes the dual risk in all cases. A gift made many years before any care need — well-documented, for genuine family and IHT planning reasons — is the best position for both regimes: IHT: gift outside 7yr window = fully exempt; LA: 10+ years before care need = very hard to establish deliberate deprivation. A gift made when care is imminent or foreseeable is the worst position for both: IHT: within 7yr window = taxable (taper applies); LA: clearly foreseeable = deliberate deprivation almost certain. Professional advice — ideally from both an IHT solicitor and a care fee specialist — is essential before making any large gift where care needs are a possibility.
Frequently Asked Questions
Does the family home count as an asset for care home fees?
Yes — the family home is included in the local authority means test unless a protected person still lives in it. Protected persons include: the person's spouse or civil partner; a relative aged 65 or over; an incapacitated relative; a child under 16 the person is liable to maintain; or a carer who gave up their own home to care for the person. If a protected person lives in the home, the LA must disregard its value — the home is excluded from the means test and care fees cannot be charged against it. If no protected person lives in the home, it is included in the capital assessment above £23,250 (England), and the person must self-fund until their capital falls below that threshold. The 12-week property disregard gives 12 weeks before the home value is included.
Can I give my house to my children to avoid care home fees?
Gifting the house to children to avoid care home fees carries a significant risk: the local authority (LA) may treat it as 'deliberate deprivation of assets' under Care Act 2014 / CSSR 2014 Reg 22 — including the property value in the means test as if you still own it. The LA looks for gifts where avoiding care fees was a 'significant operative purpose'. There is no time limit — the LA can investigate gifts made many years ago. However: a gift made many years before any care need, for genuine reasons (IHT planning, family gift), is harder for the LA to challenge. The critical factors are: timing (how close to the care need); the person's health at the time; other documented reasons for the gift. Separately from LA means testing: the gift is a PET (s3A IHTA 1984) for IHT — fully exempt if the donor survives 7 years.
What is a Deferred Payment Agreement for care home fees?
A Deferred Payment Agreement (DPA) is an arrangement between the local authority and the care home resident (or their family) where the LA agrees to pay care fees and registers a charge on the home. The charge is recovered when the property is eventually sold — either during the person's lifetime (by choice) or after death (from the estate). Interest is charged on the deferred amount by the LA. Benefits: the family does not have to sell the home immediately; the person can remain in care without the pressure of an immediate property sale. Drawbacks: LA interest accumulates on the deferred amount; the property must eventually be sold or the estate must repay the LA on death. A DPA is a right, not discretionary: the LA must offer it to eligible residents. Eligible if: the resident is a permanent care home resident; the value of the deferred charge does not exceed 70% of the property value; the resident has capital below £23,250 excluding the property.
Do care home fees reduce the inheritance tax bill?
Yes — genuine spending on care home fees reduces the estate progressively, and therefore reduces the IHT bill. For example: estate of £1m; three years of care at £50,000/yr = £150,000 spent on care; estate at death = £850,000; IHT is lower on the smaller estate. No IHT planning issue arises from genuine care spending — the money was spent, not given away. Contrast with gifting: if assets were gifted to children rather than spent on care, the gift is a PET (s3A IHTA 1984) for IHT (7yr clock) but may be deliberate deprivation for LA means testing. Care home spending reduces IHT naturally; the executors simply report the estate value at death. The key IHT opportunity arising from care: if the home is sold to fund care (after 8 July 2015), the executors can claim the RNRB downsizing addition (ss8FA-8FE IHTA 1984 — claim form LD1) against the remaining estate, potentially saving up to £70,000 in IHT.
If I sell my home to pay for care, can I still claim the RNRB?
Yes — through the RNRB downsizing addition (ss8FA-8FE IHTA 1984). If the family home was sold on or after 8 July 2015 (for any reason, including to fund care), and the remaining estate at death passes to direct descendants (children, grandchildren), the executors can claim the downsizing addition — allowing the RNRB (up to £175,000) to be set against other estate assets even though the home is no longer in the estate. Conditions: (1) the sale was on or after 8 July 2015 (completion date); (2) the estate at death includes a lesser or no qualifying residential interest; (3) at least a qualifying amount passes to direct descendants. Claim: HMRC form LD1 with the IHT400; NOT automatic — executors must claim. Saving: up to £70,000 per person. Executors need the completion statement from the original property sale as evidence of the date and proceeds.
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