Inheritance Tax and Care Home Fees UK (2026): How They Interact and the Deliberate Deprivation Risk

Care home fees and IHT are two separate regimes — they operate independently but interact in the following ways: (1) CARE HOME FEES AS DEDUCTIBLE DEBTS FOR IHT: if the deceased owed outstanding care home fees at the date of death (unpaid invoices to a care home; local authority debt for funded care), these are debts due and owing at death and are deductible from the gross estate before IHT is calculated (IHTA 1984 s.5(3) and s.162). So outstanding care fees REDUCE the chargeable estate for IHT; (2) MEANS-TESTED CARE FEES ARE NOT 'TAKEN' BY THE LA BEFORE THE ESTATE PASSES: the local authority does not take the estate in priority to beneficiaries. Care home fees are simply a debt of the estate — they rank alongside other creditors and must be paid before the estate is distributed. If the estate is solvent (sufficient assets to pay all debts), all debts including care fees are paid and the remainder passes to beneficiaries (and faces IHT if above the threshold); (3) PRACTICAL EFFECT — CARE FEES REDUCE THE ESTATE: a resident who self-funded care for 3 years at £60,000/year will have spent £180,000 from their estate before death. This reduces the estate available for IHT — which is beneficial (less IHT to pay). But it also reduces what beneficiaries inherit; (4) THE INTERACTION: a large estate (above NRB + RNRB = £500,000 for a single person) may face IHT AND large care home fees. The person who needs care, has a large estate, and lives for 3+ years in care could face: care fees reducing the estate by £150,000–£200,000 PLUS IHT on the remaining estate above the threshold. Careful planning — timing of IHT gifts vs care needs assessment — is critical but must comply with both sets of rules; (5) DEFERRED PAYMENT AGREEMENTS: where a person owns a home and needs care funding, the local authority may offer a Deferred Payment Agreement (DPA) — the LA pays the care fees as a loan secured on the property. At death (or when the property is sold), the debt is repaid to the LA. DPA debts are also deductible from the IHT estate as they are debts secured on a specific asset.

The local authority means test determines whether a person is entitled to LA-funded care or must self-fund: (1) THE CAPITAL THRESHOLDS (ENGLAND, 2026): upper capital limit: £23,250 — if assets above this, you fund the full cost of care yourself; lower capital limit: £14,250 — if assets below this, the LA funds care at no personal capital cost (income contributions may still apply). Between the two limits: tariff income rules apply; the local authority contributes to care costs proportionally; (2) WHAT COUNTS AS 'CAPITAL': savings; bank accounts; investments; ISAs; property (with exceptions — see disregards below); personal property and chattels; pension pots (before April 2027 — after Budget 2024, this may change); (3) THE PROPERTY DISREGARD — WHEN THE HOME IS NOT COUNTED: the principal home is disregarded (not counted in the means test) in the following circumstances: (a) the resident's spouse, civil partner, or cohabiting partner continues to live in the property; (b) a close relative who is aged 60 or over continues to live in the property; (c) a close relative who is incapacitated (disabled) continues to live in the property; (d) a close relative who is a child aged under 18 continues to live in the property; (e) the 12-week disregard: for the first 12 weeks after entering a care home permanently, the property is always disregarded (to give the family time to arrange care funding); (f) deferred payment agreement: where the LA agrees a DPA, the property is effectively disregarded for the duration of the DPA (the LA provides care and secures the debt on the property); (4) WHAT HAPPENS WHEN THE PROPERTY IS NO LONGER DISREGARDED: when the disregard conditions end (e.g. the spouse moves into care themselves, or the relative no longer lives in the property), the property is included in the means test at its market value at that time. The LA may fund care from that point with the resident expected to sell or enter a DPA; (5) NOTE — SCOTLAND, WALES, NORTHERN IRELAND: the thresholds and rules differ in Scotland, Wales, and Northern Ireland. This guide covers England only.

Deliberate deprivation is one of the most important — and misunderstood — rules in care home funding. It directly conflicts with what many families attempt to do: (1) THE RULE: Care Act 2014 s.70 (and Statutory Guidance Chapter 9) — where a person has transferred assets (given them away) or otherwise disposed of capital, the local authority can treat the person as STILL OWNING those assets for the purpose of the means test, if the transfer was motivated (wholly or partly) by the desire to avoid or reduce care home fees; (2) THE KEY QUESTION — FORESEEABLE NEED FOR CARE: the relevant question is whether, at the time of the transfer, the person could 'reasonably foresee' that they might need care. This is not a retrospective test of whether they expected care; it is an objective question of foreseeability. Factors relevant to foreseeability: age of the person at the time of transfer; existing health conditions (dementia; frailty; disability); family history of conditions requiring care; whether any care assessment had already been done; whether the transfer was made shortly before or after a GP diagnosis; whether a solicitor advised on care fee planning specifically; (3) NO TIME LIMIT — THE CRITICAL DIFFERENCE FROM IHT: unlike IHT, where there is a clear 7-year rule after which PETs become exempt (and gift-with-reservation rules are the only lingering risk), there is NO time limit for deliberate deprivation under the Care Act. A transfer made 10 years ago can still be treated as deliberate deprivation if the LA can show need for care was reasonably foreseeable at the time. This often surprises families who assume that gifts made more than 7 years ago are 'safe'; (4) WHAT THE LA CAN DO: if deliberate deprivation is established: (a) the LA notionally includes the transferred assets in the means test — the person is treated as if they still own the asset; (b) the LA charges full care fees as if the asset were still held; (c) where assets have been given to a third party, the LA can recover fees from THAT THIRD PARTY under Care Act s.70 — the recipient of the gift can be pursued directly for the care fees; (5) WHAT DELIBERATE DEPRIVATION DOES NOT COVER: transfers that had a genuine purpose OTHER than avoiding care fees (e.g. helping a child with a house deposit before any health concerns; a genuine gift for Christmas/birthday); reasonable spending on home improvements or living expenses; gifts made when there was no realistic prospect of needing care.

The residence nil-rate band (RNRB) provides specific IHT protection for the family home: (1) THE RNRB AND THE HOME: the RNRB (£175,000 per person; up to £350,000 for a couple with TRNRB) effectively gives additional IHT-free allowance for a qualifying residential property passing to lineal descendants. For a single person with a home worth £350,000 or less and children as beneficiaries, the home itself is broadly IHT-free (using RNRB + basic NRB); (2) THE HOME DURING THE OWNER'S LIFETIME (CARE ACT): during the lifetime of the care home resident, the home is protected by the disregard rules in the means test (where a qualifying relative occupies; or during the 12-week disregard; or under a DPA). The RNRB is entirely a death-time relief — it does nothing to protect the home from the means test during the resident's lifetime; (3) AT DEATH — RNRB APPLIES: on the resident's death, the home forms part of their estate. The RNRB reduces IHT on the home where it passes to descendants. Unpaid care fees are a deductible debt, reducing the chargeable estate. The RNRB applies to the net value of the home after the mortgage (if any) — care fee debts reduce the wider estate, not specifically the RNRB claim; (4) WHAT IF THE HOME WAS SOLD TO PAY CARE FEES: if the property was sold during the resident's lifetime to fund care, the RNRB is potentially lost (no qualifying residential property in the estate). BUT: the downsizing addition (IHTA s.8FA) applies — if the property was sold after 8 July 2015, the RNRB that would have been available on the former property can be 'brought forward' and applied against other assets in the estate passing to descendants. This prevents a complete loss of the RNRB just because the property was sold to fund care; (5) THE COMBINED PICTURE: for a single person: (a) during their lifetime: the home is protected from the care means test by the disregard (if a qualifying relative is in occupation) or by the DPA; (b) on death: the home (or its proceeds via downsizing addition) benefits from the RNRB; the outstanding care fees debt reduces IHT liability; the net estate passes to children IHT-free (subject to NRB + RNRB limits).

Gifting the family home to children is one of the most commonly discussed strategies — and one of the most dangerous for both care fees and IHT: (1) THE STRATEGY: the parent transfers the legal and beneficial ownership of the home to their children, hoping: (a) to avoid care home fees by removing the home from the means test; (b) to avoid IHT by starting the 7-year PET clock; (2) THE CARE FEES RISK — DELIBERATE DEPRIVATION: if the parent's health was declining or care needs were reasonably foreseeable at the time of the transfer, the local authority will likely find deliberate deprivation and notionally include the home in the means test. The LA can also pursue the children directly (CA 2014 s.70) for care fees. There is no 7-year safe harbour — the deprivation can be challenged at any point; (3) THE IHT RISK — GIFT WITH RESERVATION OF BENEFIT (IHTA 1984 s.102): if the parent continues to live in the house after the gift (which is the usual case), the gift is treated as a 'gift with reservation of benefit'. The home remains in the parent's estate for IHT as if the gift was never made — so the IHT 7-year clock does NOT run and the home is fully chargeable to IHT at death. The only way to escape the reservation of benefit rule is to stop living in the house or pay a full market rent to the children (which creates an income stream taxable for the children); (4) THE CAPITAL GAINS TAX RISK: if the children later sell the house, they may pay CGT on gains from the date they acquired it. The parent's PPR during the period of occupation may provide partial relief but the children's own periods of non-occupation will generate a taxable gain; (5) THE CORRECT APPROACH — BALANCED PLANNING: for most families, a better approach combines: (a) ensuring the home passes to descendants to preserve RNRB for IHT; (b) using the existing disregard rules and DPA to protect the home during lifetime for care fees; (c) making modest annual gifts (within IHT annual exemption) from income (normal expenditure out of income exemption) while in good health — not large one-off transfers of the home; (d) ensuring wills are up to date to maximise NRB + RNRB + TNRB + TRNRB. Specialist advice from a solicitor experienced in both IHT and care planning is strongly recommended.