Inheritance tax planning and lasting powers of attorney

“the concept of best interests is not limited to self-interest”

A property and finance lasting power of attorney (LPA) confers extensive powers on the attorney to deal with the financial affairs of the person granting the LPA (the donor). However, the attorney’s power to make gifts from the donor’s property is limited unless the consent of the court is obtained. A recent court of protection case involving inheritance tax planning for a large estate highlights the factors the court will take into account, and the approach it will take, when deciding whether to give its consent.

JMA’s estate

The donor in question, JMA, was suffering from early onset dementia. Her son, PBC, was her sole attorney and applied to the court for authority to make gifts of over £7 million with the intended purpose of inheritance tax (IHT) saving. The source of JMA’s wealth was an inheritance from her late husband who had sold his business for a substantial sum of money. At the time of the application JMA’s estate was worth in the region of £18.65 million, almost entirely held in investments. JMA had made lifetime gifts while she still retained capacity of £926,499, mostly to PBC. Evidence was produced that JMA had sought to minimise her tax liabilities when she was capable.

The proposed lifetime gifts would reduce the estimated IHT liability on JMA’s estate from £6.2 million to approximately £3 million if she survived the gifts by seven years.

The law relating to gifting by an attorney

The court pointed out that the attorney must act in the best interests of the donor and that in doing so should consider the donor’s past and present wishes and feelings and her beliefs and values. The court stated that it was “beyond serious doubt” that “the concept of best interests is not limited to self-interest”. For example, the Mental Capacity Act Code of Practice requires attorneys to consider factors such as the effect of a particular decision on other people.

The Supreme Court has previously stated that in assessing best interests a decision-maker must look at the donor’s welfare in the widest sense covering social and psychological welfare and  not just medical welfare.

The court’s decision

The court considered that affordability was a “necessary but not sufficient” consideration. The proposed gifts were easily afforded by JMA; if she could not afford them the gifts could not be authorised. However, there was no expectation that because she could afford the gifts they should be made.

In the court’s view there could be no default position of an assumption in favour of such gifts for tax planning purposes as each situation was case specific and required a balancing exercise of the relevant factors set out in the Mental Capacity Act. In carrying out that balancing exercise the tax reduction caused by the gifts was not entered as either a factor for or against the proposed gifts. The court, however, considered that the enhancement of benefit to individuals who JMA wished to benefit was a positive factor.

The court found that there was clear evidence that JMA had in the past wanted to make gifts to her son and others and that she was open to tax planning. The planned gifts were therefore “consistent with the beliefs and values JMA demonstrated when she was able to manage her financial affairs”. The court was satisfied that the factors in favour of the gifts outweighed the factors against and it authorised the gifts as they were considered to be in JMA’s best interests.

Summary of points to consider from this case if you wish to make a similar application

• The consent of the court is a prerequisite
• The gifts must be affordable leaving the donor with sufficient assets and income for their own needs
• Each application will be considered on its own merits
• If evidence can be produced as to prior lifetime giving and tax mitigation measures by the donor this would help satisfy the court that the gifts are in accordance with the donor’s beliefs and values
• If the results of the balancing exercise are in favour of tax planning then it is likely the court will consider that the gifts are in the donor’s best interests and can be authorised.