Making gifts for tax planning purposes on behalf of someone lacking capacity

15 August 2019

A recent ruling by the Court of Protection means that someone acting as a deputy for a person lacking capacity will in future be able to make gifts on their behalf for tax purposes, even if the person had not engaged in tax planning before losing capacity.

This is a much welcomed decision from the Court of Protection and should help deputies to undertake inheritance tax (IHT) planning to minimise the amount of IHT due on the estate of the person lacking capacity.

The particular case concerned a man (FL) acting as sole property and affairs deputy for his brother (MJL), following his brother’s heart attack in 2007 which had left him in a permanent vegetative state and receiving care on the NHS.

MJL is a wealthy man who has never married and does not have any children. He has four siblings, all of whom are also wealthy. Despite his wealth, MJL had no history of obtaining financial advice and apart from making usual gifts at Christmas and birthdays, he had not given any large sums to his relatives.

In 2010, a statutory will was made on MJL’s behalf with 60% of his  estate passing equally to his siblings and 40% passing to specific charities that he preferred.

FL applied to the Court for retrospective permission to make a modest sum of gifts on MJL’s behalf and donations to political groups. These were not controversial and were ratified.

What caused more deliberation was FL’s proposal to give away MJL’s accumulated surplus income to his siblings, and for future gifts to be made from his ongoing income surplus. FL had also applied for charities to be gifted money from MJL’s capital. It was proposed that all the beneficiaries and the gift percentages would be the same as in the statutory will.

Since his heart attack, MJL had accumulated surplus income of over £1.1m. At the time of the application, MJL’s annual income was £123,219 and as the NHS paid for his care, his expenditure was just over £16,000 a year. This left him with a surplus income of just over £107,000; a position unlikely to change due to his permanent health condition.

The proposed gifts would ultimately benefit MJL’s estate as there is less IHT payable on a reduced estate. Normally the Court considers what the protected party (the person lacking capacity) did when they had capacity and what they would have done if they had retained capacity.

What was decided?

District Judge Ellington authorised a variation of the proposed gifts even though MJL had not obtained tax planning advice and was unlikely to have done so, even if he had capacity:

  • MJL had a substantial estate and did not need the accumulated income for his care or other expenses. The judge therefore ordered that the siblings and charities could receive lifetime gifts from the accumulated surplus, based on the 60% and 40% shares in the statutory will.
  • The amount of MJL’s annual surplus income was unlikely to change. Moving forward, the deputy was authorised to make gifts from the surplus income to the siblings and the charities, again in accordance with the shares specified in the will.
  • The Official Solicitor, an independent body that acted on MJL’s behalf in the proceedings, agreed that it was in MJL’s best interests for these lifetime gifts to be made.

However, the judge did not authorise gifts from MJL’s capital in case this money was needed in the future.

What does this mean for deputies?

Normally IHT planning is not considered a main factor when making gifts on behalf of a protected person. However, the Court has opened this up as an option even if the incapacitated person had not engaged in tax planning while they had capacity.

Gifts outside of the usual customary gifts [1] must be authorised by the Court.

Our private client team specialises in estate and inheritance tax planning and Court of Protection applications. Please contact us for advice about making such applications.

About the author

Sameena Munir is a solicitor in our private client team. She has a Court of Protection focus and works closely with clients who lack capacity.  She prepares statutory will and gift applications to the Court, and creates personal injury trusts.  She also advises on lasting powers of attorney and probate matters.

[1] Customary gifts include gifts for a birth, a birthday, a wedding/civil partnership, a wedding anniversary, and for occasions such as Christmas, Eid, Diwali, Hanukkah or Chinese new year.

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