Rachel de Souza

Written by: Rachel de Souza

Rachel de Souza

Partner

Document your gifting strategy while you can

A recent judgement by the Court of Protection provides a timely reminder for everyone to think about their lifetime giving and to document how they want their wealth to be distributed.

The Court’s judgement is subject to anonymity of the parties involved and so we shall refer to the subject as Mr X. Tragically, Mr X has been in a persistent vegetative state since 2007 and  does not have the legal capacity to make financial decisions for himself. His brother, Mr Y, was appointed by the Court as his deputy to act on his behalf. Mr X is a wealthy man, currently worth in the region of £17m. He had let his financial and tax affairs slip, but had retained an accountant to bring his affairs with HMRC up to date before he became incapacitated.

Before 2007, Mr X had made regular, if modest gifts to various political organisations and more substantial one-off gifts to charity. A statutory will was authorised in 2010 dividing his estate between family and various charities.

In this application, the Court was asked to ratify certain gifts that Mr Y, in his capacity as  deputy had already made and also to approve other gifts which were proposed.

The types of gifts that were proposed potentially had different implications from an inheritance tax (IHT) perspective. Some were exempt gifts to charities and political parties, falling immediately outside of the IHT net. Gifts to other organisations and individuals were also proposed. These could have been immediately chargeable or potentially exempt subject to Mr X surviving seven years. In addition, the judge had the option of approving gifts out of surplus annual income which had accumulated over the period of incapacity. Lifetime gifts which can be shown to be part of the normal expenditure of the transferor and which are made out of income without adversely affecting their standard of living are  exempt from IHT, no matter who the recipient is.

In deciding what to do, the judge had to have regard to what would be in Mr X’s best interests. She heard submissions that gifts to family should be made out of surplus income and additional gifts to charity out of capital. In this way, the gifts would have maximised the IHT reliefs available as  surplus income would be gifted away under the provisions of the exemption for normal expenditure out of income and capital gifts would reduce the value of Mr X’s IHT estate on death.

In the end, the judge stated that she had to take into account many different views in deciding what to do. She decided that making gifts out of surplus income would be in Mr X’s best interests but rejected the suggestion of making charitable gifts out of capital, instead judging that the family and other beneficiaries should only benefit out of surplus income during his lifetime. Obtaining the most beneficial tax treatment was not her sole priority.

If Mr X had given clear instructions as to how his estate should be dealt with in his lifetime, it is possible that a different outcome would have been achieved. Mr X’s heirs and donees could have benefited sooner by receiving lifetime gifts from capital. Overall, there would potentially be greater value available to be gifted during lifetime and on death as the IHT payable on death would have been reduced by making use of lifetime IHT exemptions.

As this case has shown, the power to achieve a beneficial tax outcome when it comes to IHT remains in the hands of the taxpayer. It is a salutary reminder for all taxpayers to put their affairs in order while they can.

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