Funding old age care

I have power of attorney for an elderly relative who has moved into a residential home. I have sold her house and am considering where to invest her funds.

If I purchase an annuity to pay her fees what are the capital gains tax implications in using the balance to purchase a flat as an investment for her? The flat could be used by members of the family from other parts of the country when they visit.

Would anyone give a buy-to-let mortgage to a 90 year old with a deposit of 50% or more?

Lucinda Sankey, Walton-on-Thames

The scope for investment for paying for nursing home care is fairly wide and developing all of the time as the market for Long Term Care is increasing.

1. Saving to pay for potential care

This is really the same as saving for a pension, but is also insurance based so will provide a guarantee that care costs will continue till death.

The disadvantage is that it is "insurance", and therefore a gamble which if a claim is never made then nothing is returned to the estate in most cases.

2. Investment based plans

This combines an investment plan with an insurance plan to achieve the same objective as 1.

This can be attractive where the investment would be returned to the estate on death in the event that a claim for care was never needed.

Option 1 is better where there is plenty of income but a shortage of capital, while option 2 can ring fence a part of the investment resources which are specifically intended for long term care, and can have the added benefit of preserving a significant part of the individual's estate to pass to beneficiaries which would otherwise be decimated by the costs of care if the protection plan was not implemented.

I tend to build this into planning where possible so that if care is required then costs will be met by a combination of income (pensions), capital investments (even the equity in a property), and the LTC protection plan.

This provides a relatively flexible environment and a realistic solution to the objectives which are being set.

3. Immediate care plans

These are really annuity based arrangements providing a guaranteed payment of income to cover the costs or part of the costs of care, and will be health related.

As it is accepted that the health of the individual is unlikely to be too good, a sub-standard life annuity is provided reflecting the anticipated period when payments will be made.

If the client dies early then the annuity provider is the winner, whereas if the client lives a longer life than expected payment is guaranteed to continue till death.

This does provide certainty, but can be fairly expensive based on the current market for annuity rates.

4. Equity release

If the client does not have a capital sum for 2 or 3 but lives in a property which does not have a mortgage then equity release could be the answer.

Various schemes provide the facility to extract part of the equity held in a property and this can be used to invest for LTC protection, or to purchase an immediate care plan (annuity).

On death the loan is repaid on the sale of the house with either all being retained by the provider, or part may be returned to the deceased' estate.

5. Mortgages for pensioners

The market has developed over the years and pensioners can obtain loans reasonably easily.

The main criteria to the lender remains how will the interest be paid, and how will the loan be repaid eventually.

If the pensioner has a good and guaranteed income (from a pension) then loans can be raised on a multiple of the pension.

If equity exists then this will provide additional guarantees, and this is where a property can be used effectively in the same way as under 4.

A loan may be granted for life on the expectation that it will be repaid on the sale of the property, and the interest on the loan is covered by the pension, or possibly by rolling up against equity values, although this must be treated very carefully.

Capital Gains Tax (CGT) would only be paid in the event that the property was sold before the elderly relative died and the gain in value exceeded the annual exemption which is currently £7,700.

Any taxable gain that existed would be added to their income and taxed according to whatever rate applied (20% if basic rate taxpayer or 40% if higher).

The actual gain could even push the relative into a higher rate position when included with state pension, investment income and the income purchased from the annuity.

The property would benefit from tapering relief over ten years, in the event that the elderly relative was to survive that long, but once again the flat would have to be sold for any benefit to be achieved.

On death capital gains tax is effectively replaced by inheritance tax, but there is a considerable nil rate exemption which would require the total assets of the relative to exceed £250,000 before tax is payable at 40% on any balance above.

John Hutton-Attenborough, PKF Financial Planning

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.