An example of common sense financial planning

The Court of Protection, a specialist court where issues relating to people who lack the mental capacity to make decisions are considered, ruled that a son should be allowed to give himself £6m from his mentally incapacitated mother’s £18.6m fortune to reduce the inheritance tax (IHT) liabilities.

The son’s 72-year old mother suffered from dementia and needed full-time care. She had executed a lasting power of attorney, and appointed her son as her only attorney eight years ago.

The man, his mother's sole surviving child, went to the Court of Protection to seek approval for gifting £7m from the estate, with the majority (£6m) to himself and the remainder to chosen charities. It was speculated that the son was able to reduce his IHT liabilities by as much as £3m.

In this case, Judge Carolyn Hilder, approved the request after analysing the evidence and stating that the application had "not been improperly brought".

The mother had made a will seven years ago, under which her son would inherit the vast majority of her fortune.

Robust cash flow planning can be an effective way of demonstrating what might be considered as ‘excess wealth’.

With the full backing from the mother’s long-standing financial adviser, Judge Hilder gave permission for the gifting plan to go ahead.

In summing up the decision, the Judge said that "factors in favour" of the proposed gifts outweighed "factors against".

This is really where this case stands out as an example of clear and effective planning and common sense on two levels.

Firstly, the mother, who had inherited her fortune on the death of her husband, had taken the initiative to appoint her son as her sole attorney before her illness had become an issue. This not only gave a clear sign of the mother’s trust in her son’s judgement and decision-making but was also an insightful and pragmatic way to ensure that her inheritance plan was carried through.

It should be borne in mind that the gift from the mother is still treated as a Potentially Exempt Transfer (PET) requiring her to survive seven years from the date of the gift for the funds to no longer be subject to IHT.

Secondly, the gifting of funds was in line with the mother’s plan for her estate and in-keeping with her behaviour prior to her mental health issues.

Although the son had power of attorney, without this clear judgement it would have been more difficult for him to simply gift the money. There had to be evidence that the mother would have taken this course of action herself.

The courts need to be certain that such gifts do not deny the donor sufficient funds for their own future upkeep.

With this in mind, robust cash flow planning can be an effective way of demonstrating what might be considered as ‘excess wealth’.

Furthermore, it may be possible to include within the wording of the Power of Attorney, the donor’s stated intention to gift assets to certain beneficiaries.

If the seven-year clock for a PET is too long, it may be possible to structure gifts to take advantage of Business Property Relief, whereby the gift is nil rated for IHT purposes after being held for two years.

This case has shown that it can be possible to apply to the Court of Protection to pass money from an estate to beneficiaries. However, this can be a lengthy and costly process.

Moreover, the ruling in this case is a welcome testimonial for common sense backed up by clear, rational and unequivocal financial planning.

Simon Tuck is head of UK wealth at London & Capital