The threat of sky high care costs is hanging over older people who want to plan retirement and pass wealth to the next generation, say money experts.

A health lottery means someone in England who needs to go into a care home can deplete their assets - including their home - down to £23,250 before they get help with fees.

If you need care in your own home, your assets must have dwindled to a level set by your local council, which cannot be lower than £23,250, but your home is excluded from this means test.

New Prime Minister Andy Burnham, whose father suffers from Alzheimer's and is in a care home, has promised to 'grasp the nettle' of reforming the adult social care system.

Burnham backed plans for a national care service for England when he was in the Cabinet in 2010, but they were scuppered as the Conservatives claimed Labour would levy a 'death tax' to pay for it.

Subsequent attempts by Conservative governments to set either a spending floor or ceiling on what people should contribute to care bills came to nothing.

Care costs: Many families worry about how they will afford the bills if they need residential care in later life

A new push by Burnham to resolve the issue will probably take years and involve a fierce political battle over how to fund care.

A survey by wealth manager Mattioli Woods found over-55s rank paying for care as their primary financial worry when passing on assets, above inheritance tax - which about one in 20 estates have to pay - and the risk of running out of money in retirement.

'People naturally worry about whether they'll have enough money to fund later-life care, particularly as people are living longer and care costs continue to rise,' says Yasin Patel, wealth management director at the firm.

'For many families, maintaining financial independence in retirement understandably takes priority over what happens to their estate afterwards.

'But focusing solely on funding later life can mean inheritance tax planning slips down the priority list.'

Kate Shaw, director and chartered financial planner at FLP Financial Life Planning, says: 'Care costs are becoming a key part of retirement planning.'

'As more people see relatives need later-life care, the question is no longer just, "Do I have enough to retire?" but "Will I have enough if I need care too?".'

Paying care home bills

The £23,250 floor for assets before help from the state kicks in applies to England.

Scotland offers free personal care, Wales runs a different means-tested system where people may have to pay up to £100 a week for non-residential care, and Northern Ireland has different rules again.

You can get the NHS to pay for care based on health needs, but the assessments and red tape when applying for 'NHS continuing healthcare' are challenging.

We have guides to applying for NHS CHC and making an appeal if you are refused, written by expert James Urquhart-Burton, head of continuing healthcare claims at Winston Solicitors.

People do not have to sell their homes to pay for care if a spouse or certain other categories of people - relatives aged over 60 or under 18, for example - still live there. Age UK has a guide to property and paying for residential care here.

Meanwhile, experts warn against the pitfalls of giving away assets, including your home, to dodge care fees - this is regarded as deliberate deprivation of assets.

There is no time limit on how far back your local council can look into attempts to transfer money or other assets to avoid them.

It has powers to still count whatever you gave away when it makes financial assessments, as if you had never done so.

Yasin Patel:  Good estate planning isn't simply about reducing tax

How to plan ahead for care bills

Have the conversation with your family early, advises Kate Shaw of FLP Financial Life Planning.

'Knowing what kind of care you’d choose can help with planning. Once a care need arises, it's often too late.'

She says a personalised cashflow forecast can help you see what’s affordable and give you confidence to enjoy your wealth rather than holding back unnecessarily.

Detailed cash flow plans drawn up by advisers show how what you have got will change over time, what you can spend, and whether it will last.

Meanwhile, some people choose to buy care annuities, also known as immediate needs annuities, or typically family members with power of attorney do so on their behalf, to provide certainty bills will be covered for the rest of someone's life.

These generate a guaranteed income and come with tax benefits, which can make them attractive enough to offset the big upfront cost when someone may not have long to live.

The income is tax-free as it is paid direct to a registered residential care home or at home provider.

Kate Shaw: Knowing what kind of care you’d choose can help with planning

Shaw says: 'For private care, options such as immediate needs annuities can provide a guaranteed income towards care costs in return for a one-off lump sum, helping bring certainty to an uncertain future.'

She adds: 'Many people are now prioritising helping loved ones during their lifetime, instead of leaving everything as an inheritance.

'I’d say the balancing act between gifting and care costs gets harder, the older we get.'

But she cautions: 'Changes like gifting or altering property ownership can fall foul of deliberate deprivation rules.'

Patrick Haines, partner and chartered financial planner at Partners Wealth Management, says: ‘Residential or nursing care is often preceded by in-home care.

'Once an individual enters a care home, their main residence is frequently sold or rented to help fund future care costs.'

He stresses: 'Care must be taken to avoid the "deliberate deprivation of assets" rules, as a local authority can still assess assets that have been given away if this is deemed to have been done to reduce care fees.

'Once care costs are covered through existing income and, where appropriate, a care annuity, several options may help reduce a future inheritance tax liability.'

Yasin Patel of Mattioli Woods says: 'Good estate planning isn't simply about reducing tax. It's about making informed decisions, ensuring assets pass to the right people in the right way and giving families greater certainty during what is often an emotional and stressful time.

'Starting these conversations earlier gives families more options – whether that's reviewing wills, making lifetime gifts where appropriate, or understanding how pensions fit into an estate.'

Patrick Haines: Care must be taken to avoid the 'deliberate deprivation of assets' rules

What about inheritance tax?

Pensions will become liable for inheritance tax from spring 2027, meaning more families will face the 40 per cent levy on estates above £325,000, or £500,000 if you pass a home to direct descendants - see below for the key thresholds.

Patrick Haines of Partners Wealth Management lists some of the options for reducing an inheritance tax liability below.

Gifting from surplus income: Excess income can leave the estate immediately under current rules, writes Haines.

Outright gifts: Including proceeds from a house sale, which may fall outside the estate after seven years.

Trusts: Certain structures allow some access to assets while potentially reducing the taxable estate after seven years.

Business Relief investments: Qualifying holdings can remain accessible while potentially falling outside the estate after two years.

Life assurance in trust: Policy proceeds can help meet some or all of any inheritance tax liability.

How much is inheritance tax and who pays?

Inheritance tax is levied at 40 per cent on estates above a certain size.

You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up inheritance tax. This threshold is called the nil rate band.

A further allowance, the residence nil rate band, increases the threshold by £175,000 each - so £350,000 for a married couple - for those who leave their home to direct descendants.

This creates a potential maximum joint inheritance tax-free total of £1million.

This own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold. It vanishes completely by £2.3million.

Former Chancellor Rachel Reeves said in the last Budget these thresholds will be frozen until 2031.

> Essential guide: How inheritance tax works

> Ten ways to avoid inheritance tax legally

> How to work out and pay inheritance tax

> Help with inheritance tax: Find out more with our partner Flying Colours