With Great Power Comes Great Responsibility

Serving as an attorney or deputy is much like being a superhero in a complex web of intricacies - carrying significant responsibilities, including managing someone else's finances and daily affairs.

It's not just about scaling the heights of financial oversight, but also about navigating the labyrinthine rules around gifting.

One question that often swings into the picture is whether someone acting under a power of attorney is entitled to make gifts on behalf of the donor, especially with a view to mitigating inheritance tax (IHT).

In this article, we'll look at a case study that considers the complexities of making gifts under a Lasting Power of Attorney (LPA) or an Enduring Power of Attorney (EPA).

Much like Spider-Man, you'll need both agility and a strong moral compass to navigate these issues effectively.

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Mrs. Smith, is widowed with an estate significantly above the nil rate band for inheritance tax, largely comprised of liquid investments. Her day-to-day financial needs are well-met through state and spousal pensions.

Mrs. Smith and her late husband were always keen on reducing their IHT liability. Her late husband's nil rate band was utilised upon his death, however, leaving no additional allowances for IHT mitigation.

Mrs. Smith is now unable to make financial decisions due to diminished capacity, and her adult children are eager to manage her assets in a way that minimises the estate's IHT liability, in particular they are considering making gifts to themselves in order to reduce IHT.

Legal Context

The rules governing the actions of attorneys are stringent when it comes to making gifts.

They are generally only allowed for family or friends on customary occasions, and they must be reasonable in relation to the size of the donor’s estate.

Since the children's goal is explicitly to reduce IHT liability, this could present a legal challenge.

Case Law Insights

McDowall and Others v IRC

In 2003, a Scottish case involving Mr. McDowall's attorney highlighted the severe consequences of making unauthorised gifts. The gifts were treated as void, and the executors had the right to recover them for the estate, significantly affecting its IHT liability.

Day & others v Royal College of Music & Harris

This case revealed that an attorney, who had a pre-existing power to make gifts before the registration of an EPA, could continue to exercise this power even after registration, provided that the donor had given informed consent.

Obtaining Court Approval

Given the above case law, any substantial gifts intended solely for minimising IHT, gaining prior sanction from the Court of Protection is a must.

However, it's important to note that presenting a case solely focused on tax benefits may not find much favour in court. The success of such an application is far from guaranteed, and in my opinion, the likelihood of approval on these grounds alone is slim.

A more compelling case could be built if the aim of the gifts is to cover educational expenses for the grandchildren. This argument aligns more closely with the court's preference for ensuring the donor's best interests are being served. It's especially strong given the family history; school fees have been a consistent expenditure, so much so that the husband's nil rate band was entirely utilised for this purpose.

While there are no certainties, this educational focus makes a more compelling argument for court approval. Even then, the court may only give the green light for annual gifting, leading to a gradual approach to IHT planning rather than an immediate resolution.

Alternative Solution

One viable avenue for the children, acting under Power of Attorney, is to consider an investment in assets that qualify for Business Property Relief (BPR).

Such investments would not be classified as 'gifts,' as the investment would remain in the mother’s name, thus circumventing the legal restrictions associated with making gifts under a POA.

Importantly, assets that are eligible for BPR can be fully exempt from IHT if held for at least two years. This would align well with Mrs. Smith's and her late husband's objective of minimising IHT liability, all within the scope of her existing Power of Attorney.

Additionally, some investment providers offer life cover alongside BPR-qualifying investments. This ensures that any potential IHT liability is covered, should death occur within the two-year qualifying period.

This dual approach not only safeguards the estate from IHT but also remains consistent with Mrs. Smith's long-term financial goals and the need for prudent management under Power of Attorney.

Through such a strategic investment, the children can honour their parent’s wishes and contribute effectively to generational wealth planning, without breaching their responsibilities and legal obligations as attorneys.

Conclusion

As the use of powers of attorney becomes increasingly prevalent, it's crucial for both individuals and their financial advisers to understand the scope and limitations of what an attorney can and cannot do, particularly with respect to making gifts. It's not just about what is legally permissible; it’s about ensuring that the donor’s wishes are fulfilled without jeopardising their financial security or running afoul of the law.

By taking a meticulous approach to powers of attorney and gifts, you’re not just preserving the financial wellbeing of the donor; you’re also ensuring that any gifts made align with their long-term financial planning and goals.

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Key Concepts

What is a Power of Attorney?

A Power of Attorney (POA) allows an individual to appoint trusted family members or friends to manage their finances, property, and in some cases, welfare. POAs are commonly established by elderly individuals who may become incapacitated due to age or illness.

Important Note: LPOAs replaced EPAs in the UK on 1 October 2007. However, EPAs created before this date remain valid.

Guardianship Order: An Alternative to POA

When someone lacks capacity and no POA is in place, a Guardianship Order may be issued by the Court of Protection. This process is often more complicated, costly, and time-consuming than setting up a POA.

Defining a 'Gift'

The concept of a gift extends beyond simple birthday or Christmas presents. Lending money without interest, selling a property below market value, or transferring assets into a trust are all considered gifts. Attorneys and deputies must act within legal boundaries when making gifts on behalf of the Donor.

Legal Guidelines for Gifting

The law specifies that gifts can only be made to:

• Family members, friends, or acquaintances on customary occasions like birthdays or holidays.

• Charities.

• The value of the gift must be reasonable in relation to the size of the Donor’s estate and should align with their best interests.

Warning: Gifting to circumvent care home fees is illegal.

Navigating Larger Gifts

Making significant gifts for inheritance tax planning purposes requires prior approval from the Court of Protection. A well-structured case outlining the rationale behind the proposed gift must be submitted.

De Minimis Exceptions

The Court of Protection provides limited exceptions for small gifts, contingent on specific conditions related to the estate size and the Donor's life expectancy.

Consequences of Unauthorised Gifting

Overstepping the limits of one's authority can result in severe repercussions, ranging from removal or suspension from the role of attorney or deputy to potential legal action.