US vs UK tax impacts on the senior living market with CohnReznick

By 2030, more than one in every five Americans will be older than 65, and the number of people who are 85 or older is projected to double – to around 12 million by 2035 (US Census Bureau).

A recent study by the Joint Center for Housing Studies of Harvard University outlined the challenge this demographic shift is creating – with both wealth inequality widening and limiting choice, and supply of accessible later living options not keeping up with demand. This has resulted in concerns over what has been termed the onrushing ”silver tsunami.”

Steve Friedman

Steve Friedman, CRE, FRICS, is a tax director at CohnReznick with more than 30 years' tax planning experience. His clients cross all property types, including residential and commercial land development, single family for-sale, single family rental, and multifamily rental and for-sale.

Andrew Broadie

Andrew Ian Broadie, CPA, is a partner in CohnReznick, a US Nexia member firm, based in the Bethesda office in Maryland. Andrew is a member of the Firm’s Construction and Commercial Real Estate Industry Practices. He has over 15 years' experience providing tax planning and compliance services to individuals, corporations, and partnerships.

That said, the US senior living market has matured further and faster than the UK. According to ARCO, in the UK less than 1% of over 65s live in retirement communities, compared to 6.1% in the US.

0.1%

Investor appetite has remained strong in this context, with JLL projecting that the majority of investors in the sector would seek to increase their exposure in 2024.

“There is still a fair amount of equity capital looking to be placed,” said Steve Friedman of Cohn Reznick.

Between October 2023 and March 2024, average capitalization rates rose in each of the US sector’s key asset classes (Independent Living, Assisted Living, Memory Care and Skilled Nursing). Growth was also recorded in the relative newcomer to the sector – Active Adult (CBRE).

“We have done a lot of work for residential builders, who are focusing on the Active Adult sector”, says Friedman. “This is, essentially, a development of primary or secondary residences in communities which are restricted to ownership by at least one person [eg a spouse] who is over 55. It’s different to traditional senior living, and it’s become a larger part of the for-sale residential market.”

The US tax system is broadly favourable to real estate investment and has helped to buoy the sector further.

While not targeted solely and specifically to senior living, the REIT Investment Diversification and Empowerment Act (2007, RIDEA) was a “big change” says Ian Broadie of Cohn Reznick.

“It allowed investors through a REIT structure to operate the actual senior living delivery business. Before that law change, the REIT would generally use a triple net lease and would charge rent to the tenant, who would the run the senior living facility. RIDEA enabled the REIT to have control over the operations. We see a lot of these types of structures, and not just in senior living but also in sectors like hotels where it’s common to have a landlord and tenant who are both ultimately owned by the REIT and its investors. They control the investment, can manage it more effectively, and secure greater returns.”

RIDEA requires the tenant to indirectly manage and operate the business through an eligible independent contractor.

“This all really came about as a result of an interest on behalf of healthcare providers who wanted to be REITS explaining to our elected officials that there was a legal constraint in their ability to use a publicly held company to assist in elder care or senior living. This was less about giving the market an incentive and more about the removal of an impediment,” explains Friedman.

More generally, says Friedman, “the US has a number of incentives that are general real estate provisions, like depreciation. Our law has allowed for very substantial, accelerated depreciation of real property, exclusive of land, over the last several years. That’s an added inducement to put money into real property, including senior living.”

Tax systems can, then, play a key role in stimulating the supply side of the market. But tax has a role to play on the demand side, too.

In the UK, one of the potential barriers to encouraging more movement from older people is the personal tax position.

More specifically, the combination of a desire to hold on to, and bequeath, a main residence from an inheritance tax perspective, and the Stamp Duty cost of downsizing.

UK tax position

Stamp Duty Land Tax

Up to £250,000 tax free
5% on the next £675,000
10% on the next £575,000
12% on remaining transaction amount over £1.5m

US equivalent

Transfer Tax (Conveyance Tax)

No Federal equivalent
Varies state-by-state
Can be flat fee or a per cent of value rate
A number of states, including Texas, do not levy a Transfer Tax on property transactions

UK tax position

Capital Gains Tax

Private Residence Relief provides for a Capital Gains exemption on sales of a qualifying main home

US equivalent

Capital gains taxed as ordinary income

Section 121 exclusion provides for up to $250,000 of gain from the sale of a main home to be excluded from income
This can be increased to $500,000 if filing a joint return with a spouse

UK tax position

Inheritance tax

40% tax due on estate values over £325,000
Residence Nil Rate band increases the tax free allowance to £500,000 when passing on a home to children (and the overall estate is worth less than £2m)
Estate transfers between spouses are tax free
Unused IHT allowances transfer to a spouse, enabling a surviving spouse to be able to pass on up to £1m tax free

US equivalent

Estate Tax (Federal)

An estate tax return is required if the estate’s value exceeds the threshold for the year in question
As of 2024 the threshold is $13,610,000
Estate values over the threshold are taxed at a tiered rate between 18% and 40%
The Federal tax free estate threshold was doubled in the 2017 Tax Cuts and Jobs Act, and is set to sunset at the end of 2025. The threshold will then reduce to around $7.5m (for an individual)
The unlimited marital deduction allows for an unrestricted transfer of assets between spouses during life or upon death
A small number of states levy an additional estate or inheritance tax, in addition to the Federal tax

In Friedman’s view, the UK’s inheritance tax position which provides added incentive to pass on a main residence may hold back older people from selling their home to fund a move into potentially more suitable senior living accommodation.

“In the US, the estate tax of the decedent is based on all of the assets at fair value. There is no incremental benefit for the principal residence. I can see how that [the UK main residence relief] would be a substantial impediment because it’s not a portable tax deferral. You’re talking about potentially losing out on a tax saving on the largest asset the family owns.”

“If the delivery model of senior care is premised on rental, or purchase with age limits attached, then it’s not going to work because older people aren’t going to be incentivised to liquidate the value in their homes and become a tenant because they lose their inheritance Tax benefit.”

“Arguably therefore…” Friedman suggests, “the opportunity then in the UK is to look increasingly at in-home care that supports older people to stay in their homes.”

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