We’ve all heard the old Benjamin Franklin adage, “In this world nothing can be said to be certain except death and taxes”. Even in 1789 tax was a contentious issue!
Whilst we are of sound mind and capacity, we are free to do with our estate as we wish, subject to certain exceptions, which includes the mitigation of inheritance tax (IHT) on death.
But what if we do not get round to it? We never specifically planned to mitigate IHT, but then mental incapacity strikes and a large tax bill ensues after death?
The Court of Protection is the court in England and Wales which deals with decisions on behalf of mentally incapacitous individuals.
The court’s powers to make decisions come from the Mental Capacity Act (MCA) 2005 and its exercise of those powers is subject to the principles set out in section 1. This includes the requirement that “An act done, or decision made, under this act for or on behalf of a person who lacks capacity must be done, or made in their best interests”.
Indeed this provision also applies to all decisions made by attorneys and court appointed deputies. Section 4 of the Act and the MCA code of practice together with guidance issued by the Office of the Public Guardian should be referred to when coming to a best interest decision for an incapacitous person.
But what is the court’s view on mitigating IHT on behalf of an incapacitous person?
In short, it depends on the particular circumstances of the case but usually involves some lifetime gifting to take advantage of the seven year gifting rule. This means absolute gifts made by a person who then survives seven years do not get counted back into their estate on death for IHT, subject to certain exceptions.
The case of PBC v FMA and Others (2018) specifically examined lifetime gifting on behalf of an incapacitous adult (FMA) for the sole purpose of mitigating IHT on her death. Her estate was around £18m and she had made a Will benefitting her son (PBC), grandson, some other family members, and charity.
The court took a balance sheet approach considering various factors including FMA’s views expressed prior to losing capacity. Senior Judge Hilder stated “The MCA does not permit the court to rely on default positions, assumptions or generalisations in making a decision about whether gifts to effect tax mitigation are in the best interests of a particular protected person. The court must decide the application on nothing more and nothing less than a case specific application of section 4.”
In this case, gifts of around £8m were authorised as being in FMA’s best interests.
For advice on any application to the Court of Protection, contact Ann-Marie Aston, Partner and Court of Protection Lead, on 0121 733 4336 or at [email protected], or Sophie Fenn, Associate Solicitor, on 0121 733 4337 or at [email protected].