Wills, gifts and inheritance tax planning for Attorneys and Deputies

16 March 2016

The ability to make a Will and make gifts to loved ones is something most of us take for granted.  One of the most common reasons for doing these things is to reduce the Inheritance Tax (IHT) payable on our death.

The rate of IHT is 40% and so there is often a great deal of money at stake.  IHT can be minimised by:

  • Making lifetime gifts or putting assets into trust to reduce the value of the estate on death;
  • Making a tax-efficient Will which makes use of the nil rate band, spouse exemption and charity exemption; and
  • Investing in assets which qualify for Business Property Relief, such as AIM shares (shares quoted on the Alternative Investment Market).

However, this type of basic planning is somewhat restricted for Attorneys and Deputies acting on behalf of someone who lacks mental capacity.  Extra care needs to be taken to make sure they are not exceeding their authority.  For Wills and anything more than a modest gift, an application to the Court of Protection will be needed.

Limited power of deputies and attorneys to make gifts

An attorney appointed by a Lasting Power of Attorney or a Deputy appointed by the Court of Protection will have wide powers to deal with the financial affairs of the person who lacks mental capacity. However, these powers are not unlimited and are particularly restricted when it comes to making gifts.

IHT planning by making gifts works by reducing the value of the estate so that less IHT is payable. This can be effective provided that the donor survives seven years after making the gift.

Generally speaking, the Attorney or Deputy may only make gifts on the person’s behalf on ‘customary’ occasions, such as birthdays and weddings. Even then, the size of the gifts has to be reasonable. Unless the person was in the habit of making regular lavish gifts before they lost capacity, this limited power won’t help with IHT planning.

There is also a ‘de minimis’ rule, which allows Deputies and Attorneys to make gifts that fall in the annual exemption of £3,000 and up to 10 gifts which fall in the small gifts exemption of £250. This is a total of £5,500 per year. The de minimis rule only applies in the case of someone who is worth more than the nil rate band (currently £325,000) and who has a life expectancy of less than 10 years.  Again, this is of very limited assistance with IHT planning.

Any gift which is significant enough to be useful for IHT planning purposes will almost certainly need to be approved by the Court of Protection.

Application to court for larger gifts

If an Attorney or Deputy wants to make a large gift on behalf of someone else, they will need to get Court approval. They will need to apply to the Court of Protection to explain why they think it is in the person’s best interests for the gift to be made.  The Official Solicitor or the Office of the Public Guardian may become involved to speak to the person concerned and provide a recommendation to the Court.

The Court does recognise that reducing IHT can be a valid reason for authorising a gift.  However, they will need to know a great deal about the person’s background and finances and will need to weigh up various factors. These factors include:

The reason for making the gift;

  • How much the gift is;
  • How big the estate is and whether there will be enough left over to last the donor for the rest of their life;
  • Who the recipient is and whether the gift would result in unfair treatment of different family members;
  • What the person’s Will says and whether making the gift would override their wishes; and
  • What the person’s own wishes and feelings are likely to be in relation to the gift.

Whether or not the Court will agree that the gift is in the person’s best interests will very much depend on the individual facts. For example, if the person has a long history of being financially astute and, before they lost capacity, took care to arrange their affairs in a tax-efficient way then a gift to reduce IHT on death is more likely to be authorised.

Where an application is less likely to succeed is where the person’s estate comes from a personal injury payment.  In this case, the Court’s view is that the money was awarded for a specific purpose, e.g. to pay for care, rather than to be passed to beneficiaries on death.  A gift application for tax planning purposes is very likely to fail in these circumstances.

Consequences of making unauthorised gifts

If a Deputy or Attorney is found to have made gifts when they didn’t have the authority to do so, they could face serious consequences.  There is a very big risk that their appointment will be revoked by the Court.  They may also be asked to pay back the money personally – in the case of a Deputy, the security bond (a type of insurance policy) could be called in.  In the most serious cases, the matter may be considered to be fraud and referred to the police.

Making a Statutory Will

If someone lacks testamentary capacity, then the only way to make a Will on their behalf is by applying to the Court for a Statutory Will. This can be used to reduce IHT on death in a number of ways, including:

  • Using the spouse exemption by making gifts to the person’s spouse or civil partner or by making a life interest trust in their favour;
  • Preventing the same property being taxed twice by passing it down the generations, for example to grandchildren rather than to children;
  • Using the charity exemption - gifts to charity are free of IHT and if more than 10% of the estate is left to charity then the rate of IHT is reduced to 36%; and
  • Taking advantage of the new ‘Residence Nil Rate Band’ which is due to come into force from April 2017 and which, in the right circumstances, can allow a property worth up to £1 million to be left free of tax.

When considering this application, the Court will look very carefully at all of the circumstances to decide what is in the person’s best interests. One of the circumstances is how tax-efficient the Will is. However, this is not the only factor and may be completely overridden if there are more important considerations. The Court will take into account a wide range of other factors.  These include:

  • The nature and size of the estate;
  • The financial circumstances of the potential beneficiaries;
  • The person’s likely wishes and feelings; and
  • The testator being remembered for ‘doing the right thing’.

The Official Solicitor will almost certainly become involved in a Statutory Will application to give their view to the Court. In addition, anyone who benefits under an existing Will or under intestacy will be able to have a say and may well object to the application if it means they will get less.

Does the donor have capacity to make the gift or a Will?

It is important to remember that mental capacity is decision-specific. Just because someone has an Attorney or Deputy does not necessarily mean that they lack capacity in relation to all decisions.

If someone has the mental capacity to make a gift then, by law, they are allowed to do this even if someone else has been appointed to look after their finances.  Great care should be taken by Attorneys or Deputies making gifts on this basis.  They should make a careful record of the steps they took to ascertain mental capacity and the person’s wishes. Ideally, they should arrange for an expert to carry out an assessment of capacity specifically in relation to making gifts.
The same applies to making a Will – someone with an Attorney or a Deputy may still have testamentary capacity and can therefore make their own Will without the Court becoming involved.

Further information

If you are acting as someone’s Attorney or Deputy and are considering applying for a Statutory Will or making a gift, please contact a member of our Private Client team if you have any questions.

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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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