Welcome to your Ask Octopus column, written by Tax Product Specialist at Octopus Investments, Toyin Oyeneyin. This is where, each quarter, we will tackle some of the more complex estate and tax planning questions that advisers are asking. Consider this your advice support column for all your estate planning queries!
This quarter’s question is: My client has been medically noted as having lost mental capacity due to Alzheimer’s and has a Power of Attorney (POA) in place. However, on speaking with my client they seem to have awareness and capacity. How does this impact their estate planning – can they still make gifts or make investments such as Business Relief?
Toyin’s answer:
There are a few things to consider here, and it is naturally a sensitive issue. This question highlights the importance of asking the question to clients around their estate planning intentions, prior to losing capacity, and documenting their response.
It also highlights the importance of ensuring clients have a POA in place. As a POA grants a trusted individual the authority to act on behalf of another person in specified, or all legal, financial, or medical matters, particularly if the protected person becomes unable to make these decisions independently. This is the scenario we find ourselves in with today’s question.
Gifting
Now, let’s tackle your question around gifting. Where a person has lost capacity, The Mental Capacity Act 2005 allows gifting in certain circumstances. These ‘permitted gifts’ are typically occasional gifts of small amounts on customary occasions e.g. births, birthdays, weddings, but they must reasonable and affordable. These types of gifts typically do not require approval from the Court of Protection (COP). The COP is a court in England and Wales that makes decisions for individuals who lack the mental capacity to make decisions for themselves. The equivalent in Scotland is the Sheriff Court.
Gifting away assets, that are not ‘permitted gifts’ would require the POA to fill out an application to the COP. This is because they must show why giving away the protected person’s assets is in their best interest. These applications take two to four weeks to prepare and can take 8-16 weeks from submission to be granted. However, it could take longer or shorter depending on the particular case.
On IHT gifting strategies more generally, see my previous column for more information.
Business Relief
To your question on Business Relief (BR), unlike gifting, there is no restriction on a POA in relation to investing in BR-qualifying assets on behalf of a protected person (even if the POA is a beneficiary), and the investment does not require an application to the COP. The key point is that the POA needs to be comfortable that they are acting in the best interest of the protected person, based on the terms of the specific POA, situation and requirements. This goes for any action the POA undertakes (BR-qualifying investments or otherwise).
In terms of BR-qualifying investments, this could include consideration if the protected person had undertaken inheritance tax planning before or expressed an interest to do so, all in the knowledge that their capital is at risk and that tax treatment depends on individual circumstances which could change in the future.
This further highlights the point mentioned earlier around documenting clients wishes on estate planning strategies before they lose capacity. One of the key reasons for the differences in rules for gifting and BR investments is around ownership. With gifting, the protected person no longer has access to their assets, unlike BR investments, where the protected person still owns the investment.
Medical mental capacity vs testamentary capacity
But there is one more thing to consider. There is an important difference in medical mental capacity and testamentary capacity. For example, it is possible for an individual to have a form of dementia, and medically noted as such, but still have the capacity to write a Will, or appoint a POA, or undertake estate planning.
A testamentary capacity report can be undertaken to ascertain if an individual has testamentary capacity. This report typically takes between two to three weeks to prepare. If the outcome of the testamentary capacity report confirms that the individual has capacity, then it is possible to get approval directly from the individual for gifting, investments and other planning that one is looking to undertake, without having to use a POA or go to the COP.
Hopefully that helps and I look forward to tackling more adviser queries around estate planning in the next quarter. If you can’t wait until then, please use our free helpdesk Ask Octopus.