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Gifting with an attorney

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Brian Murphy Senior financial planning manager, Axa Sun Life

At this time of the year, with the Budget looming and the end of the financial year following shortly after, the question of inheritance tax planning often assumes a greater importance in the minds of clients.

The potentially exempt transfer (Pet) regime is still a very favourable one in that, if a client can gift assets away by making use of a Pet, there will be no IHT to pay at the date of the gift and, providing the client can survive seven years from the date of any such gift, it will fall completely out of account for IHT purposes.

Clients thinking of taking steps to plan for IHT should, therefore, be encouraged to take advantage of the Pet regime but what is the gifting position if there is a power of attorney in place?

Usually, unless specifically authorised under the power of attorney (whether ordinary or enduring), the attorney has no power to make gifts on behalf of the donor.

Exceptions under an enduring power of attorney include gifts of a seasonal nature (birthdays, etc) or gifts to a charity to which the donor has previously made gifts and/or may be expected to make gifts in the future.

Therefore, any IHT mitigation exercise by the attorney on the donor's behalf is normally severely restricted.

The case of McDowall & Others (McDowall's Executors) •IRC (SpC 382) heard before the Special Comm-issioners on June 26, 2003 emphasises the inability to reduce the potential IHT liability of the donor under a power of attorney where there is no specific power to make gifts.

In this case, Mr McDowall, who lived in Scotland, gave a power of attorney to his son--in-law which contained no express power to make gifts.

Mr McDowall's mental condition later deteriorated and he became incapable of managing his own affairs. However, under Scottish law, the power of attorney continued to have effect and his son-in-law decided to continue Mr McDowell's policy of making gifts to family members.

To this end, he made several substantial gifts. After Mr McDowall's death, the Inland Revenue issued notices to his executors, determining that the gifts were not deductible from Mr McDowall's estate for IHT purposes.

Although the executors appealed, the Special Commissioners dismissed the appeals on the grounds that on a true construction of the power of attorney, the son-in-law did not have power to make the gifts on Mr McDowall's behalf and thus Mr McDowall's executors had the right to recover them.

Consequently, the gifts formed part of Mr. McDowall's estate on death and should be charged to IHT accordingly.

This case therefore illustrates the dangers of situations where an attorney makes an unauthorised gift. So, what are the options where there is a power of attorney in force and it is desired to make gifts? The following points should be considered:

•If the donor of the power of attorney is still mentally capable, then he can, of course, make any gifts he wishes to in his own capacity.

•The power of attorney may contain an express power to make substantial gifts from the donor's estate although this would generally be very rare.

•If the donor has become mentally incapable and the enduring power of attorney has been registered, an application to the court of protection for authority to make gifts will be needed. This will normally be made via a solicitor. Although it is not possible to say precisely how long this process will take, it is suggested that an applicant should allow a period of at least three months for the court to make a decision.

IHT mitigation is a perfectly valid reason for an application to be made to the court to gift monies out of the donor's estate. When considering gifts, the overriding requirement for the court is to ensure that there will be sufficient income/funds for the remainder of the donor's lifetime.

Advisers should therefore be aware that this procedure should be followed if it is desired to effect, for example, a discounted gift plan for a client where an enduring power of attorney is in force or if it is desired to place an existing life insurance or capital redemption policy into trust as this would generally involve a gift of the market value of the policy concerned or the premium(s) paid if greater.

Gifting via a power of attorney is thus still possible but the court of protection must be consulted.

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