Inheritance Tax graphic

There are a number of rules dictating the giving of gifts through a Lasting Power of Attorney (LPA). If a planned gift falls outside of these criteria then the attorney will need to apply to the Court of Protection to be allowed to make the gift.

What many attorneys may not be aware of is the fact that court protection may also be required when the attorney is making investment-based decisions about the donor’s estate. This could arise in the course of Inheritance Tax planning and is of particular relevance to family attorneys, those who potentially also have an interest in the donor’s estate.

Conflict of interest

In a recent case a family attorney who was also an heir under the donor’s will was found to have acted in his own interests in taking IHT-related investment decisions, and not in the interests of the donor.

The individual 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 two attorneys, one of whom was a professional (solicitor) and the other was her son-in-law and the husband of an heir.

The son-in-law sanctioned an investment in IHT-efficient bonds without seeking prior approval from the Court of Protection. Subsequently, he was found to have not acted in the donor’s best interests by making investment decisions which were solely focused on saving IHT.

Plan ahead – for IHT and court protection

There are a number of ways to avoid making the same mistake. The first piece of advice is for individuals to plan early for IHT. Sitting down with their solicitor and financial adviser to establish a plan before they lose capacity is the best way to prepare their estate and ensure that any future investment decisions are carried out to their specifications if they lose capacity later in life.

It may not always be possible, depending on the nature of the individual’s estate and investment wishes, to deal with all potential eventualities in advance. However, as well as the immediate tax planning or restructuring of investments that can be carried out while the individual has capacity, it’s also possible to prepare for any application to the Court of Protection that may be likely to arise in future.

A solicitor can help draft a Letter of Wishes to be kept alongside an LPA, which can provide more detail on the type of activity and decisions they would like to see continuing in the event that they lose capacity. This can be used to support an application to the Court of Protection as evidence that the activity is consistent with your stated wishes and that the attorney is acting in the interests you have set out.

Seek court approval before taking investment decisions

It’s not always possible to plan as comprehensively as this in advance. An attorney may find themselves in a position where they will need to make a decision about investment activity once the LPA has come into effect, after the donor has lost capacity, as in our example above.

As this case demonstrates, attorneys in these circumstances should seek Court of Protection approval before making any such decisions, taking the relevant advice from a legal professional when making their application. Obtaining approval in advance protects them against any negative future repercussions.

Don’t be put off by the cost

One of the common objections from attorneys to seeking Court of Protection approval is the cost of going through the process, however this should not deter family attorneys from taking this route.

Compared with the cost of a successful challenge to their decision or the cost of not sufficiently planning to mitigate the impact of IHT on the donor’s estate at a rate of 40%, it’s an investment that’s well worth making in its ability to protect against significant legal or financial repercussions later down the line.

If you would like some advice on IHT planning or making an application to the Court of Protection, please get in contact.

Frances Davies

Associate Director, Private Law

Frances specialises in tax and succession planning for high-net-worth multi-generational families, and for business owners seeking to protect their assets and to find ways to pass their wealth on to future generations.

Learn more about Frances Davies