Can an attorney or deputy engage in inheritance tax planning for a person that lacks capacity?

Can an attorney or deputy engage in inheritance tax planning for a person that lacks capacity?

The simple answer is ‘yes’. However, as with most things legal, the reality is not quite as simple as that.

Most of the time, if an attorney or a deputy wishes to make a financial gift from the person who lacks capacities assets with a view to reduce the size of their estate, specific authority from the Court of Protection will be needed.

What Inheritance tax planning can you do without Court of Protection authority?

The Office of the Public Guardian has published very detailed guidance on what gifting and inheritance tax (IHT) planning is acceptable without additional authority. This blog focuses on what larger gifts are allowed as part of mitigating IHT payable on P’s estate. In summary, some gifting is allowed (MJ and JM and the Public Guardian [2013] EWCOP 2966) where the following circumstances arise:

  • P’s estate is worth at least the value of the nil rate band for IHT purposes. This depends on the estate but is broadly £325,000 for a person without property.
  • P has a life expectancy of less than 5 years
  • The gifts are affordable, and won’t negatively affect their standard of care and quality of life
  • There is no evidence that the person would be opposed to gifts.

In those limited circumstances, the following gifts can be made without additional authority:

  • The annual IHT exemption of £3,000 as approved by HMRC
  • and the annual small gifts exemption of £250 per person, up to around 10 people. Those people cannot be the same people that receive all or part of the £3,000.

Anything beyond this will require specific Court of Protection authority.

What will the Court consider when granting the authority?

When deciding whether to approve gifting over and above this level, the Court will consider whether the gift is in P’s best interests. In deciding this, they will take a number of factors into account, including but not limited to (PBC v JMA & Ors [2018] EWCOP 19):

  • Affordability. However, just because a gift is affordable to P, doesn’t mean it will be authorised.
  • Historic approach to tax planning. There is no presumption that IHT planning is in P’s best interests
  • History of gifting
  • Historic approach to seeking to benefit family members financially
  • Source of wealth
  • Whether the gifts are from income or capital
  • How the gifts may impact on P’s will or maintenance obligations.

Can I change P’s investments to reduce IHT payable on death?

If investment structures are put in place that aim to reduce the amount of IHT payable on P’s estate, specific authority will be needed to do this if the attorney, deputy or their family could benefit from this reduced tax. This is because the Court of Protection considers that the attorney or deputy faces a conflict of interest if they are seeking to invest P’s funds in a way that reduces IHT, but potentially puts those funds at greater risk during P’s lifetime (Re PP [2015] EWCOP 93 and [2016] EWCOP 65). 

Author Holly Mieville-Hawkins, Enable Law