Making gifts and tax planning after losing mental capacity

Lifetime gifts to family members is common in tax planning. This case study explains how gifts can be made by relatives who have lost mental capacity.

Who is this case study relevant for?

This case study is relevant for families who are planning for inheritance tax for a family member who has lost mental capacity (for example, they may be in a care home, though they need not necessarily be elderly).

The problem

If your relative has lost the mental capacity to look after their own financial matters, it can be difficult to arrange their financial affairs to minimise inheritance tax.

Even if a Lasting Power of Attorney (LPA) is in place, the Mental Capacity Act only allows small gifts to be made by the attorney. The LPA certainly does not authorise the attorney to undertake comprehensive inheritance tax planning. So, what options does the family have?

Case Study

Eric (65 years old) and Margaret (60 years old) have been married for just over 40 years.  They have two children, James and Amanda.  Eric was a successful businessman – he ran his own manufacturing company.  Margaret has never worked and much of the family wealth is in Eric's name.  Eric was taken ill suddenly last year following a stroke.  His mobility isn’t too bad, but his mental capacity rapidly deteriorated. 

Margaret is worried.  She feels that she and Eric are comfortably well-off but their son James is struggling to make ends meet.  Margaret is also worried that there could be a large Inheritance Tax liability after both she and Eric have died.  Margaret would like to make gifts of several thousand pounds to the children now, as she would enjoy seeing the children getting a benefit from it.  

Eric has put a Lasting Power of Attorney in place.  He appointed Margaret, James and Amanda as his financial attorneys. 

Our advice

We advised the family to make an application to the Court of Protection for permission to make gifts on Eric's behalf.  

The Court Order authorises the attorneys to:

1. Make a large lump sum gift of capital to James and Amanda
2. Make future gifts out of excess income
3. Use Eric's annual allowance of £3,000 to make gifts in future years.

This arrangement allows the family to reduce the estate and, therefore, potentially save inheritance tax which as calculated as a percentage of the estate.

Why did the Court allow this without Eric being able to give his consent?

The Court's decision is always made in the best interests of the donor (in this case, Eric). The Court's reasoning for allowing the order was:

1. Potentially a large Inheritance Tax saving could be made which would benefit Eric's estate.
2. After the gifts are made, Eric would still be left comfortably well off for the remainder of his life; 
3. Amanda and James are going to inherit from their parents in the long-run anyway.

Key points

• Gifting in the Court of Protection is possible and significant Inheritance Tax savings could be made. 
• Attorneys need to tread very carefully as the law only allows them to make 'small' gifts. 
• If in doubt, or if larger gifts are desired an application to the Court of Protection can be made.