Sometimes one comes across a case that initially raises the eyebrows, only for them to lower once again when the full details become clear. Certainly, an application by a person’s attorney for property and affairs for the court’s authority to make gifts exceeding £7 million from that person’s estate, including £6 million to himself, causes the eyebrows to ascend.
Before I go any further I should briefly explain what a lasting power of attorney (‘LPA’) is, for the benefit of those who don’t know. LPA’s are generally made by people who need or are likely to need, the help of others to make decisions on their behalf. They are typically made by older people, appointing an adult child of theirs to be their attorney. The person making the appointment is known as the ‘donor’. There are two types of attorneys: attorneys who look after the donor’s property and financial affairs, and attorneys who look after the donor’s health and welfare. The donor will often appoint the same person or persons to be both types of attorney. It should be noted that an attorney can’t make decisions on behalf of the donor until such time as the donor lacks the capacity to make those decisions. Until then, they can only help the donor make decisions. They should always be guided by what is in the donor’s best interests.
So to the case, PBC v JMA & Others. It concerned a 72-year-old woman who suffers from dementia and who lacks the capacity to make decisions for herself. She had appointed her son to be her attorney for property and affairs. Her son, as indicated, applied to the court for authority to make gifts exceeding £7 million from her estate. The rationale behind the application was that the gifts would, if the mother survived for long enough, result in a substantial inheritance tax saving to her estate.
At this point, I should briefly explain how inheritance tax and gifts work. Inheritance tax is charged, usually at 40%, on the amount of an estate above a threshold, which currently stands at £325,000. Obviously, therefore, the less money there is in the estate above the threshold, the less inheritance tax is paid. Of course, a person could easily seek to reduce the value of their estate, and therefore the amount of inheritance tax payable, by making gifts to people before they die. However, the taxman is aware of this ‘dodge’, and therefore there are rules relating to the making of such gifts. Essentially, the rules state that, save for small gifts, there is still full inheritance tax to pay on any gift made by a person in the three years before they die. After that, the amount of inheritance tax reduces for each further year before they die, until the gift is no longer counted towards the value of the estate after seven years. Thus, the gift does not reduce the amount of tax for three years, then it reduces it gradually so that if the giver lives for seven years the estate is reduced by the full amount of the gift.
So back to the case. I don’t need to go into the full details for the purpose of this post, but the basic facts were:
1. That the proposed gifts would potentially reduce the inheritance tax payable by the mother’s estate by more than £3 million;
2. That the estate would still be left with some £10 million, which was considered to be more than amply sufficient to meet all the mother’s needs; and
3. That it was argued that the gifts were in any event essentially in accordance with the mother’s wishes as to what should happen to her estate upon her death – the gifts were simply ‘bringing the payments forward’.
Hearing the case Her Honour Judge Hilder said that payment of tax from the mother’s estate after her death would have no direct impact upon her, and it was not part of the court’s function to protect an inheritance.
Nevertheless, it was clear that the mother would have wished to enhance the amount that her beneficiaries were to receive, and Judge Hilder accepted that the proposed gifts reflected the mother’s wishes. In short, she was satisfied that the factors in favour of the proposed gifts outweighed the factors against (see below), and she, therefore, authorised the payments.
You can read the full judgment here (the pros and cons of the case are neatly summarised in a table in paragraph 67).