Last updated: February 10, 2013 10:21 am

Inheritance tax thresholds to be frozen

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George Osborne is to freeze inheritance tax thresholds to help fund sweeping reforms to elderly care.

After months of coalition wrangling, ministers will announce on Monday that the government will cap the cost of social care in England at £75,000 from 2017.

The question of how to pay for the increasing cost of looking after an ageing population has dogged successive governments; the last Labour administration tried but failed to reach a political consensus.

The announcement on Monday will be presented as proof that the coalition is still able to take tough decisions, even as Tories and Liberal Democrats prepare to do battle in this month’s Eastleigh by-election.

To fund the social care reforms – which could cost an extra £1bn a year by the end of the decade – Mr Osborne will freeze inheritance tax thresholds at £325,000 for individuals and £650,000 for couples for three years from 2015.

The policy could revive suggestions that a “death tax” is helping to fund the social care reforms and is a reminder that the chancellor has failed to carry out his dramatic announcement in 2007 that he would raise the inheritance tax threshold to £1m.

Other departmental cuts are also expected to be required to help plug the funding gap, along with other existing changes announced to pensions.

Jeremy Hunt, health secretary, will announce on Monday that any social care costs above £75,000 will be picked up by the state although “hotel charges” for food and accommodation will not be covered by the guarantee.

Mr Hunt told the BBC’s Andrew Marr show that he hoped that insurance companies and pension schemes would step in to provide cover for any costs up to £75,000. “I don’t want anyone to pay anything at all,” he said.

He added that it was vital for the credibility of the reforms that they were “fully funded”.

The FT reported last year that the Treasury believed the money should come from the health budget, a move which would have risked delivering a real-terms cut to the NHS. However it is understood that Mr Hunt has seen off that threat.

The plan for a cap on care costs is based on the recommendations of a government-appointed commission, led by the economist Andrew Dilnot, which called for it to be set at between £35,000 and £50,000.

That was ruled out because the Treasury balked at the estimated £2bn a year cost. Setting the cap at £75,000 will reduce the costs to more manageable levels.

At one stage it had appeared that an announcement on Dilnot would form the centrepiece of the midterm review in which David Cameron, the prime minister, and Nick Clegg, the deputy prime minister, outlined their shared agenda in the run-up to the general election.

However, the Treasury was concerned that assuming a big additional funding commitment jarred with the narrative about the importance of deficit reduction. While Mr Cameron and Mr Clegg mentioned their support for the “principle” of Dilnot, they made no specific announcement.

While placing a limit on care home costs will appeal to the “grey vote” on which the Conservatives depend, some in government are known to be concerned that the new cap will principally benefit the better off in the southeast.

Lynton Crosby, a strategist with a record of delivering election victories who has been brought in to advise the prime minister, is concerned that policies should appeal to voters across the UK, including those in northern marginal seats which the coalition is desperate to hold at the election.

Against that backdrop, Mr Hunt is likely also to emphasise that people with assets of £123,000 – up from the current level of £23,250 – will be spared full care costs.

Paul Burstow, a former care services minister who has criticised the Treasury for failing to come up with the cash to implement Dilnot, said it generally came as a shock to people to discover that their care was not free.

Yet for some the costs could be “catastrophic”, with one in 10 facing a bill for more than £100,000. He added: “Implementing Dilnot would make the system fair and more predictable.”

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