Gifting by attorneys
A recent case in the Court of Protection (COP) again highlighted the importance of observing legislation in respect of the ability of attorneys to make gifts and indeed support others they may be expected to make provision for.
In that context it is worth reminding attorneys what their legal responsibilities and duties are.
The Statutory Framework
The Mental Capacity Act 2005 at section 12(2) sets out what gifts an attorney is able to make under a Lasting Power of Attorney (LPA) and indeed an Enduring Power of Attorney (EPA).
Under an LPA, an attorney can make a gift on customary occasions. Such occasions could include births, marriages, Christmas, Eid, etc. and of course the anniversary of any birth or marriage.
The ability to make gifts under an EPA is slightly more restricted in that they can only make gifts on seasonal occasions on the anniversary of a birth or marriage.
In addition, such gift must be for somebody related or connected to the person who made the Power of Attorney (the donor) or to a charity that the donor supported or might have supported.
So far as the size of gift is concerned this is expected to be reasonable. The attorney is expected to take into account the circumstances in each case, and in particular the size of the person's estate.
The Office of the Public Guardian (OPG) who oversees the administration of LPAs and EPAs cannot give precise figures or guidance as to what is reasonable. Instead, attorneys are expected to consider the impact of the gift on the donor's financial situation, looking at the current and future income, assets, capital, savings and future needs.
This is a "best interests" decision and it is not the same as asking what the person would do if they had capacity. Instead, the attorney must consider:
- (a) whether the donor was in the habit of making gifts or loans before they lost capacity;
- (b) the donor's life expectancy;
- (c) whether that person may have to pay for care costs or care home fees in the future;
- (d) are family members being treated equally and, if not, why not;
- (e) if the intended recipient is related or connected to the donor; and
- (f) the amount of the gift should be affordable and no more than would be normal under a customary occasion or a charitable donation.
Therefore, section 12 cannot be used to make gifts over and above what the donor would have made when they had capacity. Indeed, if the donor was not in the habit of making gifts prior to losing capacity then arguably the attorney will have not authority to begin making gifts simply because the individual has lost capacity.
Can the LPA be amended to circumvent the rules?
LPAs allow donors to express preferences and instructions. Donors should feel to express in the preferences section circumstances in which they may wish for gifts to be made or support given. Equally they may also instruct their attorneys not to make gifts. What a donor is nor permitted to do is instruct their attorneys to make gifts over and above what section 12 allows. Any attempt to do so will fail upon registration as the COP will strike out the offending section or refuse to allow the LPA to be registered at all.
De minimis exceptions
In the case of MJ and JM v The Public Guardian  EWCOP 2966, the COP recognised that it would be disproportionate to insist on a Court application being made for every action outside of the gifts referred to previously.
Therefore, the Court in the judgment confirmed that an attorney may use the annual Inheritance Tax (IHT) exemption of £3,000 and can also make further gifts of £250 for up to ten people provided that:
- (a) the donor is worth more than the nil rate band (i.e. they actually have an IHT problem);
- (b) the donor has a lift expectancy of less than five years;
- (c) the gifts are affordable and will not affect standards of care and life; and
- (d) there is no evidence that the donor would have objected.
The scope therefore for making IHT gifts is relatively limited.
In the recent case known as Various Lasting Powers of Attorney, Re  EWCOP 40, the COP was asked to consider circumstances where 11 LPAs all included instructions which appeared to exceed the statutory authority as set out in section 12(2) Mental Capacity Act 2005. Most were in relation to providing financial support to adults.
In general terms, the COP has the power to sever an offending provision in an LPA or indeed not allow registration of the document at all if they think it conflicts with the legislation.
As part of the judgment, the Judge set out some rules in the form of a decision tree setting out the thinking process to be followed by someone acting as an attorney and, in particular, when they can use the donor's funds to benefit someone else.
The Judge was at pains to point out that this decision tree should not be used to try to justify gifts outside of section 12(2), nor should this judgment be used in relation to the donor providing provision for people they have a legal duty to in any event.
It is early days, but it appears that the judgment could be helpful and that it could be used to justify ongoing dispositions, particularly in circumstances where the donor had made such dispositions prior to losing capacity. One example could be to justify the ongoing payment of premiums on whole of life policies written in trust.
The key would be to actively go through the decision making process, apply the test and record the outcome every time.
As this judgment cannot be used to carry out IHT planning on behalf of the donor, it is of limited effect.
Actions not authorised by the Powers of Attorney
We have seen the circumstances in which gifts and dispositions can be made, but the COP has been very clear about what actions cannot be carried out by the attorney without the permission of the COP, and these would include the following transactions:
- (a) a gift of property such as land or a house;
- (b) charitable donations that do not fall within the section 12(2) exemptions;
- (c) paying school or university fees;
- (d) creating a trust (including gift trusts, discounted gift trusts, loan trusts, etc.);
- (e) interest-free loans allowing someone to live rent free or at mates' rates;
- (f) gifts out of excess income, particularly if this is not something the donor did previously;
- (g) investments in an attorney's own business or that of a family member;
- (h) deeds of variation; and
- (i) amendments to Wills.
If an attorney seeks to carry out transactions which are not authorised by the Power of Attorney, then the OPG (who have the general power to administer LPAs) could make a referral to the COP, which could in turn mean that gifts have to be repaid or attorneys could be removed or subject to additional conditions in respect of their actions.
The Revenue's position regarding unauthorised gifts
The IHT form specifically asks whether anyone acted under an LPA by the deceased during their lifetime and the IHT form also records gifts and transactions made in the seven years prior to the deceased's death.
There is a precedent in a Scottish case (McDowall and others (executors of McDowall, deceased) v Commissioners of Inland Revenue and related appeal  STC (SCD) 22). Here there was a series of gifts out of excess income made by an attorney to family members. On the death of the donor, the Revenue sought to argue that the gifts made by the donor did not constitute regular gifts out of income and should not be allowed.
The decision of the Court was that the gifts would have overcome the threshold of being considered to be gifts out of excess income, but as the attorney did not have the authority from the Court to make such gifts they should be treated as voidable and therefore still part of the deceased's estate at the date of death. Effectively those gifts failed and were brought back into the estate for IHT purposes.
Therefore, it is crucial that in respect of gifts which fall outside of the statutory rules, permission from the COP is sought.
This is particularly important as if the gift fails for IHT purposes it will also come back into the estate to be distributed in the Will.
Obtaining authority from the COP
In respect of all transactions which attorneys do not have the power to make, attorneys are able to apply to the COP for authority to enter into the arrangements.
The precise information that the COP requests varies depending upon the application that is being made. Broadly speaking they would expect to see the following:
- (a) medical evidence to confirm loss of capacity and life expectancy;
- (b) a clear demonstration of before and after scenarios in relation to the transactions, particularly when gifts are contemplated; and
- (c) compelling evidence that the gift is in the donor's best interests.
The COP itself is likely to appoint the Official Solicitor to act on behalf of the donor to ensure that they are independently represented. The process can be very slow and involved and the general advice is that if any transaction is contemplated, to apply to the Court early in order to set the wheels in motion.
Business Property Relief (BPR) schemes – a comment
Rather than apply to the COP, in some circumstances attorneys may consider entering into investments, which after a period of two years would provide qualification for relief under the BPR rules to ensure that the investments made do not fall subject to IHT in the event of the donor's death.
It is worth noting that a Judge in a case that went before the COP commented that:
- (a) if the primary purpose of investment is to save IHT, then the benefit to the donor is unclear;
- (b) if the investment also has a higher risk profile, then that investment may not be in the interests of the donor (i.e. the investment value is dependent on the IHT rules staying the same regarding BPR exemptions); and
- (c) if the attorney is also a beneficiary of the Will (which would be commonplace) then the benefit may primarily be to benefiting the attorney as a potential beneficiary rather than the donor, and therefore there may be a requirement to apply to the COP for authorisation in case there is a deemed conflict of interest.
It is important to ensure that each scenario is looked at in the same merits and, in particular, that the attorneys impartially apply the "best interests" rules and if in doubt should make an application to the COP to ensure that any investment is properly sanctioned.
Planning while people still have capacity
The importance in much of this is record-keeping, determining the attitudes to risk, IHT planning in general and also attitudes towards gifting too.
It will be easier to obtain orders from the Court if the attorney is able to demonstrate that IHT planning was something that was actively contemplated by the donor while they still had capacity.
In addition, individuals should also give some thought as to whether they can structure their Wills in such a way that in the event of their death their loved ones are cared for, but the Wills themselves have structures in place that enables assets to be passed on to the next generation without attorneys or the Courts themselves having to be involved.
- Careful planning and record-keeping is key.
- While clients still have capacity, it is important to record their attitude towards tax planning generally as well as gifting.
- Attorneys should be encouraged to take early advice to ensure that any contemplated gift can be validly made.
- Attorneys should be encouraged to have a clear audit trail to overcome the "best interests" test, particularly if they are seeking to rely on either the de minimis provisions or are looking to make IHT related investments.
- If gifts are not sanctioned under the Power of Attorney then an attorney should seek authority or ratification from the COP, but be prepared for a long drawn-out process if the application is not deemed urgent.
- Wills are still a helpful planning tool.
This is a complex area of law and we would welcome enquiries from attorneys and their advisers in relation to the application of the rules to ensure that any IHT planning is effective.
For more information contact any member of the Private Wealth team.