Jonathan Riley
Posted on 23 May 2017

Case Study – Inheritance tax planning advice on behalf of elderly relatives

Michelmores regularly advises families who wish to undertake inheritance tax planning on behalf of elderly relatives who no longer have the mental capacity to do this for themselves. 

A common scenario involves a family member who has been appointed as an elderly relative's attorney (under a registered lasting power of attorney) exploring ways in which they may be able to reduce the value of the elderly relative's estate for inheritance tax purposes and, consequently, the likely inheritance tax liability that will arise on the elderly relative's death.

We recently advised an attorney in this situation. The attorney's grandmother had dementia and was being cared for in private nursing accommodation. The annual costs of the grandmother's care were able to be met from her income and, each year, the grandmother had income which was surplus to that required to maintain herself.  As a result, the grandmother's estate was increasing in value annually as was the likely inheritance tax liability of her estate.

The grandmother had undertaken inheritance tax planning during her lifetime and her attorney wished to make gifts from his grandmother's estate for tax planning purposes.  However, as an attorney, his authority to make gifts on his grandmother's behalf was limited to making gifts of similar value to those made by his grandmother on customary occasions, such as to relatives on their birthdays. This prevented the attorney from undertaking any effective tax planning on his grandmother's behalf.

It is however possible for an attorney to obtain authority from the Court of Protection (the "Court") to make more significant gifts from a relative's assets for tax planning purposes. To do this, an application to the Court is required.  We advised the attorney on the application process and prepared the application.  An important part of the application involved demonstrating to the Court that the grandmother had surplus annual income after meeting the annual costs of her care and that the making of gifts from such surplus income was in the best interests of the grandmother.  On the facts, the Court was satisfied that this was the case and approved the application. 

As a result of the application, the attorney now has authority to make gifts from his grandmother's surplus income for a number of previous tax years, the current tax year and future tax years.  The usual rule is that gifts are only outside an individual's estate for inheritance tax purposes seven years after the date of the gift.  However, the usual rule does not apply to gifts made from surplus income if the conditions set out in section 21 of the Inheritance Tax Act 1984 are met.  Gifts which satisfy the conditions should be immediately outside an individual's estate for inheritance tax purposes.  For this reason, the authority granted by the Court is significant in terms of enabling the attorney to undertake meaningful tax planning on his grandmother's behalf.  The Court also authorised the attorney to make gifts from his grandmother's capital using her annual £3,000 inheritance tax allowance.