Along with pensions, the funding of care in later life is set to become a key talking point as Britain’s elderly population expands. The proportion of the British population aged more than 65yrs old is now 16 per cent, compared to 11 per cent in 1951 and 5 per cent in 1911, according to Centre for Economic Policy Research. But it is predicted to increase to nearly 20 per cent in 2031 and more than 26 per cent in 2071, according to the Government Actuaries Department. As many more of us are likely to live for longer, the number of people needing care in later life will increase. Yet the reality is that few of us plan for this.

Long-term care is expensive and costs are increasing. Average annual fees for care home-home residents across Britain are £34,528 for nursing care and £24,128 for residential care – a rise of more than 70 per cent in the past 10 years, according to the Laing & Buisson 2008 UK Market Survey. While the cost for someone in their own home by a local authority is cheaper, the cost could still surprise many. The NHS Health & Social Care Information Centre says that in 2008 the average fee was £21.50 an hour which, assuming the care requirement is three hours per day, seven days a week, would cost about £23,500 per annum.

Under the current regime only those with assets under £23,000 are eligible to receive financial support from the state, meaning almost anyone who lives alone in their home will be excluded from receiving this and will need to pay the full cost of care themselves. While the thresholds for England and Northern Ireland are £23,000, they are £22,500 in Scotland and £22,000 in Wales.

Recently the government said it wanted to build a national care service in England that was “fair, simple and affordable for all”. The Green Paper Shaping the Future of Care Together announced by Andy Burnham, the Health Secretary, contains suggestions for reform that would restructure care funding. The favoured options include a partnership system, where the Government funds between one quarter and one third of the costs, but also assists in ensuring that insurance arrangements are available to fund the remainder.

The cost of the insurance anticipated to be about £20,000 to £25,000 as a lump sum, would need to be met by the individual. The final suggestion is a comprehensive system, with everyone paying a premium to the Government when they reach 65. While this option would entitle everyone to care without further charge, the estimated cost of £17,000 to £20,000 would be payable even if there was no subsequent need for care.

While these proposals may offer a solution for people choosing care from a local authority, many will prefer to choose what they perceive to be a higher standard of care from an alternative provider and use accumulated wealth to pay for it. Traditionally, anyone with significant assets in later life would be advised to focus on the liability for inheritance tax, employing strategies such as gifting assets to loved ones. But the growing likelihood that care will be required creates a dilemma. Should people gift away assets to mitigate the liability to inheritance tax and risk having insufficient funds to pay for any care required or should they keep these funds to pay for care and have their estate bear inheritance tax of 40pc?

While some believe that a solution is providing gifts to loved ones with a condition that they can take benefit from such gifts if needed in later life, the reality is that this does not work. Government legislation surrounding “gifts with reservation” makes it virtually impossible for these schemes to retain their tax-efficient intentions, even if a gift is made that subsequently has a detrimental effect on a person’s ability to pay for care later.

St. James’s Place Wealth Management, among other companies, has tried to tackle the issue by developing solutions that enable people to plan against the effects of inheritance tax while ensuring capital is available to fund care. These schemes mitigate exposure to inheritance tax by accepting gifts of capital, avoiding “gifts with reservation” rules as the person making the gift cannot benefit from the fund accumulated unless they meet specific conditions, namely qualifying for care. When these conditions are met, the individual receives a predetermined income that can then be used to pay for the care. The complex interaction between tax rules and long-term care regulation means it is essential for people considering an option like this to speak with an expert before any action.

Anyone wanting to comment on the Green Paper should do so before November 13.