INHERITANCE TAX - 30.04.2015

Is tax planning allowed under a power of attorney?

Lasting powers of attorney

Anyone (we’ll call them the grantee) can grant a lasting power of attorney (LPA) that appoints someone else to handle their finances. However, it doesn’t give them free rein to do what they like. In fact, their job is more administration than anything else and this limitation can stand in the way of tax-saving arrangements.

Investments

The grantee can include special restrictions in the LPA limiting the power of investment, plus the Public Guardians Office can intervene if an attorney uses the money under their control for a high-risk investment. Even tax-saving schemes with HMRC approval that could benefit the grantee, e.g. enterprise investment schemes, might be a no go. However, some aren’t a problem; essentially, these are:

• ISAs
• life assurance investment bonds.

Trap. While an attorney of an unrestricted LPA can freely purchase an investment bond, placing it in a trust, e.g. for inheritance tax (IHT) planning purposes, would only be allowed where permission is given by the Court of Protection (CoP).

IHT planning

An attorney can make small gifts for birthdays, Christmas, marriage to people related or connected to the grantee, and to charity. These will be exempt for IHT purposes where they fall within the limits for the type of gift being made (see The next step ).

Tip. It’s not well known that attorneys can also make gifts to utilise the grantee’s IHT annual exemption, £3,000 for 2015/16, and small gifts exemption of £250 per year for up to ten people.

Trap. Gifts covered by the Tip can only be made under an LPA where the grantee has a life expectancy of five years or less, their estate is worth in excess of the IHT nil rate band (£325,000 for 2015/16), the gifts can be afforded by the grantee and there’s nothing to indicate they would object to them being made.

A greater plan

As we’ve already indicated, IHT planning is limited unless the CoP is willing to grant permission for larger gifts or transfers from the grantee’s estate. Making an application to the CoP is likely to cost between £5,000 and £10,000 in legal fees and will only be approved if the gift won’t impact on the grantee’s potential later needs, e.g. nursing home fees. However, as IHT equal to 40% of the amount given following approval by the CoP can be saved, it’s easy to see why an application might be worthwhile.

Tip. Because of the high cost of the application for large value gifts or risky investments, and the possibility of refusal by the CoP, we recommend that anyone considering an LPA undertakes an IHT review of their estate beforehand. They can then freely make gifts or use IHT-saving investments, such as AIM portfolios or investment bond trusts, before the LPA comes into effect.

For details of permitted IHT-efficient gifts, visit http://tipsandadvice-tax.co.uk/download (TX 15.15.07).