12 March 2020
Attorneys’ Gifts As A Tax Planning Strategy
An attorney appointed by a Lasting Power of Attorney has wide powers to deal with a donor’s financial affairs. (The ‘donor’ is the person who lacks capacity to look after their affairs.) Is the attorney allowed to give away the donor’s assets? At first blush that sounds crazy and wrong. But there might be good reasons for doing so. Attorneys’ gifts can form part of a tax planning strategy.
Giving away assets during the donor’s lifetime is one of the most effective tax planning strategies. As well as the simplest. Inheritance tax is payable on the value of an estate, so the lower the value of the estate, the less tax is payable.
When Is An Attorney Allowed To Give Away Assets?
As an attorney, you can generally make gifts on the donor’s behalf only on certain occasions. These are so-called ‘customary’ occasions such as birthdays and weddings. Even then the gifts must be of a reasonable size. Unless the donor was known for lavish gifts, this power is unlikely to be a major part of a tax planning strategy.
Can An Attorney Ever Give Away Larger Gifts?
You might be considering – as part of your attorney duties – tax planning on behalf of the donor. If the limited powers to give gifts mentioned above are not very useful, can you ever give away larger gifts so as to mitigate inheritance tax? The answer is Yes – but you will need court approval.
You would need to apply to the court and demonstrate that making the gift is in the best interests of the donor. The court will take into account a number of factors:
– The reason for making the gift – tax planning can be a valid reason.
– The value of the gift come up compared to the size of the estate.
– How much the donor has to live on for the rest of their life.
Broadly the court will need to be persuaded that the donor is likely to have made the gift if they still had capacity. The court approved gifts on the donor’s behalf in the case of FL v MJL (2019).
Example
Take the example of a donor who is a widow with two children. She has sufficient funds to cover her living costs, and further assets of £500,000. If she leaves the £500,000 her children in her will, there will be inheritance tax to pay on £175,000, i.e. £500,000 less the Nil Rate Band of £325,000. That’s a tax bill of £70,000.
But if the attorney had made a gift (with permission from the court) of £200,000, this would have reduced the size of the estate to £300,000, which is below the Nil Rate Band. No tax would be payable. To put it another way, the children would inherit an extra £70,000.
Attorneys’ gifts can form part of a tax planning strategy for the donor, although advice should be taken to ensure that this is done effectively.
Notes
For further information on Lasting Powers of Attorney, click here.
For further information on tax planning, click here.
Case report: FL v MJL (By His Litigation Friend, the Official Solicitor) 1 [2019] EWCOP 31.