Lost capacity? Gifts out of surplus income still possible to save IHT in estate worth £17 million

Is gifting wealth to reduce IHT still possible once capacity has been lost? Recent case law suggests it is.

Following a recent decision by the Court of Protection, deputies and attorneys may have increased power to make gifts on behalf of someone who has lost capacity in order to reduce their inheritance tax (IHT) liability.

The deputy of a man worth £17 million and in an irreversible coma has obtained approval from the Court of Protection to make substantial cash gifts to family during his lifetime to mitigate the inheritance tax due on his death.

Estate planning – the fundamentals

On death, estates with a value in excess of the available nil rate bands are taxed for IHT at 40% (or 36%). An easy way to reduce IHT liability is to reduce the value of your estate by giving away income you no longer need. Donors are able to make unlimited gifts provided they qualify as 'normal expenditure out of income'.

Unfortunately, once someone has lost capacity, they are unable to make gifts themselves and deputies/attorneys are strictly limited in the gifts they can make on their behalf. Historically, this has prevented estate planning for clients who have already lost capacity.

However, a recent decision by the Court of Protection means that it may still be possible to make gifts from the surplus income of an incapacitated person, reducing their tax liability and increasing the amount they can pass to loved ones on death.

The Facts

In 2007, MJL suffered a cardiac arrest which caused him to fall into a coma from which he is not expected to recover. His estate is worth in excess of £17 million, and its value is expected to increase during his remaining lifetime.

In order to reduce the value of MJL's estate (and therefore the tax bill on death), his deputy applied to the Court of Protection for permission to gift MJL's accrued surplus income.

The Court of Protection authorised a £1.2 million gift to MJL's siblings and agreed to ongoing gifting of MJL's surplus income during the remainder of his lifetime, saving hundreds of thousands of pounds in IHT.

Significance

There are many reasons why an individual's capacity to manage his own property and finances may diminish, for example, brain injury or stroke, mental health issues or severe learning disabilities. Society is living longer, increasing the chance that at some stage we may have to live with dementia in one form or another.

For those clients who have lost capacity, this decision is hugely significant. It offers those facing a large IHT bill the opportunity to reduce their estate and the amount of tax payable, even after they have lost capacity.

If you would like advice or some more information about estate planning on behalf of someone who has lost capacity, please contact Michelmores' Tax, Trust and Succession team.