Court of Protection authorises substantial gifts from estate, primarily for tax planning purposes

The judgment in the case of PBC v JMA & Ors [2018] EWCOP 19 highlighted that, in appropriate circumstances, the Court will authorise significant gifts from a protected person’s estate.

It established that gifts from a protected person’s estate could be considered to be in accordance with the person’s presumed wish to save inheritance tax on behalf of the beneficiaries, although each case would turn on its facts. My previous blog ‘Court of Protection authorises gifts of £6m by an Attorney to himself’ discusses this.

In the more recent case of FL v MJL (by his litigation friend, the Official Solicitor) [2019] EWCOP 31, in line with its previous ruling, the court gave permission for substantial cash gifts to be made from MJL’s estate to family members and political causes, in order to avoid inheritance tax.

Facts

• MJL is a gentleman in his sixties.
• MJL is unmarried and has no children. MJL’s parents have died. He has four siblings; FL (the applicant), RL, BL and AR, each of whom have children of their own.
• MJL suffered a cardiac arrest in November 2007, thereafter he fell into a persistent vegetative state and, sadly, has not recovered. MJL now lives in hospital.
• District Judge Sarah Ellington recognised that the family has suffered needs to be recognised. MJL’s siblings each visit him once or twice a year.
• MJL’s siblings were each acknowledged as wealthy, which appears to be principally as a result of money passed to them by one or both parents.
• MJL was 54 years old when he lost capacity.
• FL, the applicant was appointed as MJL’s sole Deputy for Property and Affairs by orders dated 21 July 2008 and 23 January 2012.

MJL’s financial needs

MJL receives NHS funding. MJL has an estate valued in excess of £17 million comprised, broadly, of the following:

• Pension scheme: £66,000
• Debtors: £53,215
• ISA account: £167,595
• Cash at bank: £173,036
• Cash with investment manager: £59,099
• Investment portfolio: £16,823,116

FL submitted that MJL’s annual income is £123,219 (generated from investments) and his annual expenditure is £16,079, resulting in an annual surplus of £107,140. FL stated that the private cost of MJL’s care, as currently provided by NHS Continuing Healthcare, would be in the region of £175,000.

The application before the court

The application concerned:

1. retrospective ratification (to the extent required) of various (relatively modest) gifts previously made on behalf of MJL by FL as deputy including:
   1. Christmas gifts to family members totalling some £2,575 from 2009 to the date of the application;
   2. gifts to the Labour Party totalling some £1,764.50 from 2009 to the date of the application;
   3. gifts to The Red Banner totalling some £282 from 2009 to the date of the application; and
   4. gifts to Charter 88 totalling some £465 from 2009 to the date of the application.

2. authority to make prospective gifts on behalf of MJL, pursuant to section 18 (1) (b) of the Mental Capacity Act 2005 (‘MCA 2005’) including:
   1. gifts totalling some £1,184,387 to the taxable beneficiaries under MJL’s will (his four siblings), such gifts to be borne by the accumulated surplus from MJL’s income that arose between July 2009 and July 2017;
   2. gifts totalling some £789,591 to the charitable beneficiaries under MJL’s will (and in the same proportions as each of them receive under that will); such gifts to be paid out capital. The proposed gifts to the taxable beneficiaries under (a) and the proposed gifts to the charitable beneficiaries under (b) are in the ratio 6:4; which reflects their respective shares under the statutory will.
   3. authority to make ongoing gifts to the taxable beneficiaries from MJL’s future surplus income (from year end 2018 onwards), subject to an annual reserve of £20,000;
   4. authority to make ongoing gifts to the charitable beneficiaries from MJL’s capital (in a total amount equal to 2/3 of the ongoing gifts made from surplus income under (c)). These gifts are to be shared between the charitable beneficiaries in the same proportions as each of them receive under MJL’s will.

MJL’s statutory will and lifetime gifting

MJL’s statuary will, dated 5 January 2010 divides his estate as follows:

• 60% to his siblings in equal shares (with a gift over to their issue in substitution);
• 9.75% to Amnesty International;
• 9.75% to Oxfam;
• 9.75% to The Medical Foundation for the Care of Victims;
• 9.75% to War on Want; and
• 1% to the League of Friends of the hospital where MJL lives.

When MJL had capacity, he set up standing orders to three political organisations, The Labour Party, The Red Banner and Charter 88, none of which are registered charities. Gifts to these organisations since 2009 now total £2,016, £321 and £525 respectively.

In 1988, MJL gave £20,000 or £25,000 to a charitable organisation set up by the family which is now named in memory of both MJL’s parents. Whether it was £20,000 or £25,000 is not material, given the size of MJL’s estate at the time.

RL gave evidence that MJL felt passionate about giving money to charity.

There was no evidence that MJL made any significant financial gifts to his family before he lost capacity. Gifts to the children of his sibling (s) were mentioned in the context of having been carefully and well-chosen by MJL, not for their lavish or generous character.

MJL’s tax affairs

MJL has not carried out any substantial tax planning before he lost capacity. He had set up a meeting with Rawlinson & Hunter accountants but did not attend as he had been taken to hospital.

The accountant at Rawlinson & Hunter had advised MJL’s parents and siblings on financial planning previously, including at different accountancy firms. However, this was MJL’s first contact with the accountants.

There was evidence from all of MJL’s siblings about their own attitude to tax planning and what they feel MJL would have done had he not lost capacity.

The Official Solicitor’s response to the application

In response to this first limb of the application, set out at (1) above, the Official Solicitor for MJL submitted that it was in MJL’s best interests for these payments to be ratified, and that there be authority to continue making the standing order donations (subject to one query about Red Banner, which was resolved by the hearing).

In response to the second limb of the application, set out at (2) above, the Official did not agree that the proposal was in MJL’s best interests. Instead, she has proposed the following:

1. a gift of £1,184,387 be made and divided as follows
   1. 60% to the siblings in equal shares;
   2. 40% to the charitable beneficiaries in the same proportions as in the will.

2. ongoing gifts of MJL’s surplus income be made and divided as follows:
   1. 60% to the siblings in equal shares;
   2. 40% to the charitable beneficiaries in the same proportions as in the will.

The law

The court carefully considered the law in this area, specifically section 16 and 18 MCA 2005. The court also carefully considered the ‘best interests’ test set out in section 1 MCA 2005.

The parties referred and relied heavily on the case law in this area. Interestingly, the court was directed to now Senior Judge Hilder’s comments in PBC v JMA & Ors [2018] EWCOP 19, namely that the court must decide the application on nothing more and nothing less than a case-specific application of section 4 MCA 2005.

District Judge Sarah Ellington also recognised that she was assisted by the principles adopted by Senior Judge Hilder on review of the relevant case law in PBC v JMA & Ors [2018] EWCOP 19.

Judgment

District Judge Sarah Ellington confirmed that she was satisfied that the factors in favour of the proposed gifts supported by the Official Solicitor outweigh the factors against those gifts and the factors in favour of the gifts proposed by the Applicant.

She confirmed that she did not agree that gifting in different proportions between the will beneficiaries was in MJL’s best interests.

The gifting proposed at paragraph 6 of the Official Solicitor’s position statement was authorised. Gifting as proposed in part 1 of the application was approved. It was determined that the family gifts fall within the deputy’s authority and the gifts to political organisations continue what MJL set up when he had capacity and are in his best interests. The approval given was as follows:

1. Ratification of past gifts as follows:
   1. Christmas gifts to MJL’s nephews totalling £2,925; and
   2. donations made by standing order of £2,016 to the Labour Party, £321 to the Red Banner and £525 to Charter 88.

2. A gift of £1,184,387 (which is accrued surplus income) be made and divided as follows:
   1. 60% to the siblings in equal shares; and
   2. 40% to the charitable beneficiaries in the same proportions as in the will.

3. Ongoing gifts of MJL’s surplus income be made and divided as follows:
   1. 60% to the siblings in equal shares;
   2. 40% to the charitable beneficiaries in the same proportions as in the will.

4. Ongoing payments to the Labour Party, the Red Banner and Charter 88 in line with the existing payments

Conclusion

In line with the judgement given by Senior Judge Hilder in PBC v JMA & Ors [2018] EWCOP 19, this case confirms that the Court will authorise significant gifts to deputies, family members and others.

In MJL, the court gave particular weight in carrying out the ‘balancing exercise’ to the following:

1. how MJL would want to be remembered;
2. the tax planning (or lack of) that MJL had undertaken when he had capacity
3. the extent to which MJL had made charitable donations when he had capacity
4. MJL’s political views;
5. MJL’s feelings towards his family and their wealth; and
6. the terms of MJL’s statutory will.

Interestingly, DJ Ellington did not accept the proposition of FL (if proposed as necessarily true) that structuring one’s affairs in a manner which enhances the provision that can ultimately be made under one’s will for family and other beneficiaries clearly affects how a person is remembered.

The key in these cases remains to ensure that:

• any application for approval is made either prior to any gift(s) or as soon as possible following such a gift;
• full and frank disclosure and details of the circumstances are given; and
• where appropriate, professional advice is sought.