Gaining retrospective authority for gifts made by an attorney

Imagine an individual (the donor) executed and registered a property financial affairs lasting power of attorney (LPA) but now lacks capacity to manage their affairs. The donor owns a significant property portfolio and several investment bonds, producing a gross annual income of about £130,000 and a taxable estate for inheritance tax (IHT) purposes over £2m. Income vastly exceeds expenditure. The probable IHT liability is £688,000, which is increasing month by month, as income and capital accumulates, not needed for the donor’s living and personal costs.

An individual with capacity in this position would be well advised to take advantage of lifetime gifts and annual exemptions to reduce their IHT liability over time, but the donor's attorneys do not have the authority under their LPA to make these tax planning gifts. They cannot even make use of IHT annual exemptions, or make gifts out of surplus income, without consent from the Court of Protection.

However, they do have limited power under an LPA or enduring power of attorney (EPA) to make reasonably sized gifts on occasions such as birthdays and weddings, they may also invest in IHT-friendly products such as business property relief schemes if it's in the donor's best interests.

Looking back

In addition to seeking authority to make future tax planning gifts, the novel element of a recent application to the court was to seek retrospective consent for actions already taken by the attorneys.

If certain gifts were not made by the tax-year end, attorneys could not use the donor's annual exemption for the previous tax-year and gifts of surplus income (as HMRC would treat previous years' surplus income as becoming capital).

As such, our advice was to make the payments prior to the tax-year end and seek retrospective authority. Because the gifts were to be made to the attorneys in their personal capacities, they could repay them to the donor if authority was refused.

The attorneys had previously used a discretionary investment manager to manage the investment bonds and, with no express authority in the LPA, retrospective authority was also required.

We worked closely with the attorney’s financial adviser to produce a report setting out the donor's IHT position if no action was taken, an estate summary and cash-flow analysis projecting how the assets (even on conservative assumptions about income and care costs) would continue to generate more than sufficient income to cover expenses.

This report was central to the attorney's court application. The figures underwent detailed examination by the official solicitor, appointed as the donor's litigation friend. After negotiation, the parties agreed figures then put to the court, which then made an order:

• ratifying the investment manager’s discretionary management to date and authorising an ongoing appointment;
• ratifying the gifts the attorneys made in previous tax years (including the gifts made by the tax-year end following our advice); and
• authorising the attorneys, for both current and future tax years, to make gifts out of the donor’s surplus income and to use her annual IHT allowance. 

In total, the court retrospectively ratified gifts over £65,000, which saved over £26,000 of IHT, future gifts of £3,000 per annum, plus the donor’s surplus income, to increase that IHT saving significantly over time. The application costs were met by the donor’s estate, further saving IHT. The successful application resulted from legal and financial advisers working together on a detailed financial report and highly persuasive financial projections. SJ

 

BEYOND AUTHORITY What could happen if attorneys act outside the scope of their permission and who could complain? The aim of any tax planning gifts is, of course, to reduce the value of the donor's estate, so the beneficiaries under the donor's will (or potential beneficiaries under the intestacy rules if there is no will) who have suffered a loss may potentially have a cause of action against the attorneys personally. HMRC could declare the gifts to be invalid, treat those assets as forming part of the donor's estate on death and thus subject to IHT. Local authorities would have greater scope to ignore the purported gifts and include the assets as the donor's when undertaking care fee assessments irrespective of whether they survived seven years.

 

Ben Saunders is a solicitor at Thomas Eggar