Gifting? There’s no time like the present
29 October 2019
Leaving IHT planning to later life can cause unnecessary problems for families, especially where the individual may have lost mental capacity. Graeme Robb, senior technical manager, Prudential, examines the issues and the latest guidance.
Recent guidance from the Office of the Public Guardian (OPG) simply reaffirms the potential problem of leaving IHT planning to later in life. The guidance in question is aimed at Attorneys and Deputies investing for a person in England and Wales lacking mental capacity.
It contains this statement: “If you want to make gifts to reduce the impact of inheritance tax, you may need to make an application to the court.”
A link is provided to OPG Practice Note 7 ‘giving gifts’.
The following points in the Practice Note are a useful reminder of the restrictions surrounding gifting for IHT purposes.
What does the law mean by a gift?
A gift can include:
These all require an application to the COP before proceeding.
From a financial planning perspective, common insurance company trust arrangements such as Gift Trusts, Probate Trusts, Discounted Gift and Loan Trusts will all give rise to a gift.
Capacity to make a gift
If the person has capacity, they should normally make the gift themselves, rather than request it to be made on their behalf. Why? A Deputy’s authority is strictly limited to making decisions that the person lacks capacity to make. An Attorney is restricted by the legal limits on their gift-making authority.
Deputy/Attorney accepting a gift
They must not take advantage of their position to personally benefit.
General rules about gifts
Apart from some exceptions, the law says you must not make gifts from the person’s estate. With an LPA, there is an exception if the gift satisfies all three points below. It must be:
1) Given on a customary occasion for making gifts within families or among friends and associates (for example, birthdays, weddings, civil partnerships)
2) To someone related or connected to the person or to a charity the person supported or might have supported
3) Of reasonable value, taking into account the circumstances and the size of the person’s estate
With an EPA, the exceptions are similar, but slightly narrower in what they allow.
Beware also any gifting restrictions or conditions inserted by the donor into the EPA or LPA.
If an Attorney wants to make a gift outside the restrictions, they must apply to the COP for approval.
For Deputies, the gifting power is stated in their deputy order and is normally similar to an Attorney’s legal authority.
What is a reasonable gift?
This isn’t defined, but the Attorney/Deputy is expected to decide how much is reasonable by considering:
1) The impact of the gift on the person’s current and future financial situation
2) Whether making the gift would be in the person’s best interests:
and so on.
Who are the gifts for?
Are family members being treated equally – if not, why not?
Gifts to those who are not relatives or closely connected may be outside the authority. Maybe the person made gifts to someone before losing capacity. Would it be reasonable to continue?
The person’s will
It’s possible to take the contents of a person’s will into account when making gifting decisions, as it is an indication of their wishes.
Applying to the COP
Attorneys or Deputies wanting to make a gift for which they lack authority need to apply to the COP.
There are de minimis exceptions for gifts that don’t justify a court application, providing the person’s estate is worth more than £325,000. In case law, Senior Judge Lush said the exceptions can be taken as covering the annual IHT exemption of £3,000 and the annual small gifts exemption of £250 per person, up to a maximum of, say, ten people when:
a) The person has a life expectancy of less than five years
b) Their estate is worth more than the Nil Rate Band (currently £325,000)
c) The gifts are affordable, taking into account their care costs, and won’t adversely affect their standard of care and quality of life
d) There is no evidence that the person would be opposed to gifts of this value being made.
Being able to gift small amounts up to the IHT exemption without COP permission, doesn’t mean that IHT planning can be carried out without the court’s permission. Neither can reliance be placed on other IHT exemptions to avoid applying to the COP for permission to gift.
Deprivation of assets
Transferring an asset out of the person’s name doesn’t necessarily remove it from a cost of care assessment by a local authority. When assessing whether a resident qualifies for assistance, the local authority can look for evidence of deliberate deprivation of capital and assets.
The OPG protects people in England and Wales. In Scotland, the equivalent body is the OPG in Scotland. In Northern Ireland, the Office of Care and Protection (Patients Section) performs a similar role. It is worthy of note that in Scotland, a continuing Power
of Attorney over Property and Financial Affairs can be created. It’s possible to include powers for the Attorney to make gifts, and if desired, limits can be imposed on the size of such gifts or the potential recipients.