The update fails to address the concerns around business relief investments in IHT planning strategies
The Government Office of the Public Guardian last month updated its guidance on giving gifts. Most advisers, and certainly those operating in the estate planning market, will be well aware of the rules and limitations faced by attorneys when considering making gifts on behalf of a donor.
However, given the degree of subjectivity and varying interpretations of the rules in this area, official guidance is welcome.
In truth, there is little new in this document, which is perhaps to be expected as we have not seen any recent change in the law. That said, it is helpful to have a single note containing the major issues in one place, particularly on the following issues:
- Guidance on what constitutes a reasonable gift.
- Guidance on what constitutes a best interest decision.
- The criteria for de minimis exceptions, including the annual inheritance tax exemption of £3,000 and the small gifts exemption £250 per person.
- Confirmation that an interest free loan constitutes a gift (the waived interest).
- The options available to the OPG in respect of unauthorised gifts.
What is disappointing, though, is that the OPG did not use this opportunity to clarify or at least issue guidance around the use of business relief investments.
It is common practice – and certainly something promoted by business relief product providers – that an investment made by an attorney on behalf of the donor does not represent a gift.
The argument goes that it is legitimate and often the only IHT planning option available where an individual has lost capacity. The logic appears clear: the donor is not making a gift as the business relief investment is in their name.
However, the legitimacy of this practice has been called into question following the matter of “MM” – a Court of Protection case heard in September 2016.
The case involved an application to ratify some gifts that had been made by an attorney out of the assets of the donor. An application that ultimately was denied. Of interest to advisers was the comments made by Judge Batten in the case, specifically around business relief investments. He stated:
“AW (the attorney) arranged for the investment of a significant proportion of MM’s investment capital in investments that are high risk and low return and whose sole advantage is the reduction of liability to IHT. It is the purpose of the investment that is of concern. The benefit will accrue to AW and his family, not to MM (AW and family were MM’s beneficiaries). AW is in a position of conflict in establishing and reviewing these investments. A fresh look is needed as to whether those investments are in MM’s best interests”.
A new precedent?
While neither the official solicitor nor the public guardian sought to argue it was not in the best interests of an incapacitated person to engage in IHT planning, and despite the fact it was as a “best interest” decision such that the conclusions drawn by the judge are not binding, it gives a strong indication of what a court faced with a similar fact pattern would decide.
As stated, the OPG’s updated guidance makes no reference to this issue or indeed the need for the attorney to avoid conflicts of interest in such circumstances.
But the most disappointing aspect, given the value of such advice to both the donor and their family, is that no guidance was provided on how such conflicts can be avoided such that any business relief investments made will not be questioned.
In absence of any guidance, where the donor has a track record of IHT planning, combined with attorneys who have no conflict of interest as they are not the donor’s beneficiaries, the use of business relief should be safe.
Conversely, those facing facts of a case similar to that of MM may well in the future be advised to seek approval from the OPG. As for the plethora of cases that will fall between these two stools and what is the most appropriate position to take? Your guess is as good as mine.
Tony Mudd is divisional director, development and technical consultancy, St James’ Place