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Preserve it and save: how conditional exemption can protect your heritage... and your wallet
Charles Richardson
A gift can be anything of value, such as cash, personal possessions and property. If a person chooses to dispose of an asset for less than it is worth this is also considered to be a fit. The act of giving a gift is typically done to express care, appreciation, celebration or goodwill. Gifts are often exchanged during special occasions such as birthdays, weddings, anniversaries and customary occasions, but they can also be given spontaneously as a gesture of kindness or generosity.
It is important to consider Inheritance Tax liabilities when making gifts. At present, there is an annual allowance of £3,000 to gift to other people, which will not form part of their estate for inheritance tax (“IHT”) purposes. This extends to £6,000 if their annual allowance was not used in the previous year. There are further exemptions such as small gifts up to the value of £250, wedding gifts, charitable or political contributions, gifts from income, and funding to support dependents.
However, when an individual wants to make a financial or property gift in their lifetime, a capacity assessment may be required if their capacity is in doubt and particularly if they are making a large gift.
When assessing an individual’s capacity to make a gift, the same two-stage capacity test is used. The test is set out below:
- Can the person understand the gift they are making? This includes understanding the value of the gift, who the recipient is, and how the gift may impact their own financial situation.
- Can the person retain the information needed to make the decision to give the gift? They must be able to retain the information needed to make the gift and weight up the information in a rational way.
The key is to establish whether or not the person in questions truly understands the transaction (giving the gift) and its affect. If a gift is trivial, a lower degree of understanding suffices than if, for example, a gift deals with a person's entire wealth. A proportionally larger gift that would substantially affect the value of a person’s estate requires a high degree of understanding for the transaction to be valid.
For example, if a donor gifts their only valuable asset to one of their children, they must be able to understand that, on their death, the effect of the gift will mean any of their other children will not be entitled to a share of their estate.
The assessor can use various pieces of information to help in making their assessment. Medical evidence such as previous psychological reports, medical history and records. Statements from certain individuals who may be close to the person being assessed are also of use. This could include family, friends and care takers. Documents containing the wishes and feelings of the person being assessed will also be considered, such as Wills/codicils or any records of a person’s intentions to gift.
What happens if an individual lacks capacity to make a gift?
If an individual lacks capacity to make a gift, but has already made the gift, the Court of Protection can declare the transfer of the gift void.
If an individual lacks capacity to make a gift, but has not yet made the gift, an application will need to be made to the Court of Protection for authority to make that gift if it is outside of the accepted gifting rules. Whilst the gifts outlined above are generally deemed to be acceptable, the Office of the Public Guardian (OPG) has recently published new, stricter guidance regarding gifting and the process a deputy or attorney should follow when making such a decision.
Deciding whether to make a gift is an important role of a deputy or attorney. In the context of being a deputy or attorney, a gift refers to the transfer of money, property or possessions without expecting anything in return. Examples of gifts may include birthday or presents on customary occasions, charitable donations or financial support to family members.
The law states that deputies and attorneys must not give gifts, unless the three points below are satisfied:
- The gift is for a customary occasion (e.g. births, birthdays, weddings, religious celebrations);
- The gift is charitable or to be given to someone related or connected to the person concerned, and they would reasonably be expected to make gifts to them;
- The gift is of a reasonable value, considering the circumstances in each case and the size of the person’s estate.
Where a deputy has already been appointed to manage the individual’s property and financial affairs, the deputy must apply to the Court of Protection for authority to make larger gifts and they must show why it is in the individual’s best interests to make the gift.
How we can help
We have a wealth of experience making applications to the Court of Protection, including authority to make a gift on an individual’s behalf. If this is something you need assistance with, please contact us.
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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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