Regulation  

Showing resolved intent

Showing resolved intent

Whenever an adviser meets a new client there are three matters that should always be on the agenda: does the client have in place an up to date will, a lasting power of attorney (LPA) and – for inheritance tax purposes – a letter documenting an intention to gift surplus income?

A recent article in a national newspaper suggested readers should encourage their elderly parents to put in place an LPA. The incentive mentioned was that it would save about £5,000 in the costs that would be paid if a parent became mentally incapacitated and an application had to be made to the Court of Protection to appoint the adult child as a deputy in order to administer the financial affairs of the parent.

But beyond the initial application for the appointment of a deputy, there are the costs of seeking advice about – and complying with – the ongoing obligations imposed, such as filing annual accounts. In a recent case, Senior Judge Lush estimated these at roughly £2,000 to £3,000 pa for a panel deputy until the death of the patient.

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Mental incapacity can strike suddenly and unexpectedly. There is a good argument that almost every adult, whatever the age, should have an LPA in place.

The immediate IHT income exemption

Similarly, where the client is expected to pay inheritance tax (IHT) on death and is making or is prepared to make gifts, obtaining the immediate IHT income exemption for (or for some of) those gifts should be considered by the adviser.

The law is set out in section 21 IHTA 1984, as explained in Box 1; this provision is now well known. Not so well known is that there are two ways in which making a gift as “part of the normal expenditure” of the taxpayer can be shown. These alternatives were set out in the case of Bennett & others v IRC in 1994. There is a very brief summary in the IHT Manual at paragraph 14244.

And Box 2 contains part of the judgment of Mr Justice Lightman in this important case, highlighting the alternatives for showing a pattern, either by “reference only to a series of payments” or by “proof of the existence of a prior commitment or resolution.”

After a client’s death there is a minefield of challenges to cross before HMRC will accept that the s21 exemption can apply. It is the lack of appreciation of how technically complex it is to use the exemption successfully that creates the biggest hurdle.

Particularly difficult are single gifts that are irregular, for example house deposits to adult children, even if made from income, whether that income is accumulated to some extent from earlier years or not.

HMRC’s IHT Manual at paragraph 14242, in considering “pattern of gifts”, states that HMRC staff “must leave out of consideration any gift clearly made for some special purpose.”

In the same paragraph HMRC goes on to instruct that, “There is no set time span over which the taxpayer must show the pattern of giving. A reasonable span would normally be three to four years. However you can consider a longer period if this helps the taxpayer to show that the gifts were normal.”