The starting point as with all decisions made on behalf of a person who lacks mental capacity (“P”), is to consider what is in P’s “best interests”.
Attorneys and, typically, deputies too, are restricted in only being able to make gifts (1) to any charity to which P has made gifts or might have been expected to make gifts or (2) on customary occasions to persons who are related to or connected with P. Gifts beyond these circumstances require the approval of the Court of Protection. In all cases, the value of each gift must not be unreasonable, having regard to all the circumstances and, in particular, the size of P’s estate.
It should be noted that whilst an attorney who is related to or connected with P is allowed to make gifts to themselves on customary occasions, a deputy would always need to seek Court of Protection approval for any gifts that he or she was proposing to make to himor herself.
When is a “customary occasion”? Such occasions include weddings, birthdays and Christmas, but events such as christenings, graduations and even housewarmings have also been allowed as falling within the definition.
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As for the size of the gift, it may be considered to be appropriate and in P’s best interests to make a larger gift on the occasion of, say, an 18th birthday. However, as with all decisions, the affordability of the gift with reference to the size of P’s estate and P’s financial needs is of paramount importance. Customary occasions are highly unlikely to be viewed as a valid excuse for the deputy or attorney to try to achieve some inheritance tax (IHT) planning, even if they do consider this to be in P’s best interests! The Court will look very sceptically on any attorney who believes that P’s generosity would extend to making gifts that have the effect of leaving hardly anything left for P, even if P’s own needs are fairly modest.
In the recent case of Re GM Senior Judge Lush noted that in some other jurisdictions there are fixed limits on the extent of gifts that the equivalents of attorneys and deputies can make, based on a percentage of P’s taxable income. In our own jurisdiction, the question of what gifts are going to be in P’s best interests remains a question of striking the right balance in each individual situation, although the Judge did give some guidance about what could be viewed as de minimis test for gifts not requiring the Court’s approval.
His view was that gifts each year up to the annual IHT exemption of £3,000 plus the annual small gifts exemption of up to £250 per person for up to 10 people i.e. a total of £5,250, would fall within this threshold, assuming:-
- P’s life expectancy is less than five years;
- their estate exceeds the nil-rate band for IHT purposes;
- the gifts are affordable having regard to care costs and will not affect his or her standard of life;
- there is no evidence that P would oppose the making of such gifts.
If a deputy or attorney is feeling nervous about the level of a gift they were proposing to make, it is always open to them to make an application to the Court of Protection. Where a deputy or attorney seeks to make a gift which they reasonably consider is not significant and know or believe that there are unlikely to be any objections towards, there is even a shortened process for making the application.
It has been said that the de minimis principle offered by the Judge in Re GM Senior Judge Lush should not be interpreted as being of universal application and is unlikely to be appropriate in estates which are only just above the IHT nil rate band, for example.
However, it is commendable that the Judge has at least tried to give some practical guidance for what is a difficult area to “get right”. As I said at the start, this is the sort of approach that clients are looking for from their advisers, and if Judges are live to this, then so much the better.