Attorneys reminded of fiduciary duties when seeking to save IHT
A recent case warns attorneys about higher risk investments that benefit the attorney personally through IHT reliefs.
The law in brief
An attorney under an LPA has a ‘fiduciary duty’ to act in the donor’s best interests. If an attorney is likely to profit personally from his or her position as attorney, then they may be in breach of their duties, or at the very least have a potential conflict of interest with the donor.
The investments involved in this case were ‘Octopus Bonds’ which are designed to qualify for the IHT relief known as Business Property Relief (BPR) by investing directly into small companies and/or trading shares on the AIM market. BPR is an IHT tax relief designed to assist owners of SME businesses with the effects of inheritance tax.
The brief facts
The case of re MM highlighted a potential ‘conflict of interest’ bear trap for attorneys who are also heirs under a will.
MM was an elderly lady with an estate valued at approximately £1.3 million. She suffered with dementia and was resident in a care home.
She had 2 attorneys, one of whom was a professional (solicitor) and the other (AW) was her son-in-law and the husband of an heir.
In this case, AW sanctioned an investment in ‘Octopus Bonds’, which are essentially an IHT mitigation scheme that seek to utlilise BPR (Business Property Relief) on the investments if they are held for 2 years. If BPR is available, the investment would be free from IHT after the investor dies.
The judgment of the case has several important consequences for professional advisers, but the element that we would like to bring to your attention is the investment in IHT efficient bonds by attorneys.
In short:
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The case recognised that if the primary purpose of an investment was to save IHT after the donor’s death, then the benefit to the donor is unclear.
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Further, if that same investment has a higher risk profile, then the investment may not be in the best interests of the donor (for example, as a consequence of the investment value being dependent on IHT rules remaining friendly towards that investment).
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Finally, if the attorney investing on the donor’s behalf is also a beneficiary under the will of the donor, then that attorney may have a conflict of interest as a result of the investment benefitting him directly, rather than the donor (who may be potentially disadvantaged by the investment being high risk). Any conflict of interest may be referred to the Court of Protection for authorisation.
The decision (in part)
It was held that AW had not acted in MM’s best interests in investing in the Octopus Bonds. DJ Batten said (amongst other things):
“I consider that AW did not act in MM’s best interest in instructing an IFA to make investments whose primary purpose was for the saving of IHT. I consider that AW has a conflict of interest in carrying out a review of the IHT saving Octopus investments and deciding whether they are in MM’s best interests and in making future decisions about investments solely in MM’s best interests without regard to whether JW*, he and their family will benefit.”
*[NOTE: JW was the daughter of MM and the wife of the attorney AW]
We must stress that this case and judgment covers many other aspects relevant to professional advisers and attorneys. Other key areas covered were:
- Unauthorised gifting by an attorney under an LPA
- Ratification of unauthorised gifts
- Removal of lay and professional attorneys
- Costs
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