Analysis
The Applicant, who was the sole deputy for property and affairs of his brother MJL, made an application for
(i) ratification of small gifts previously made on behalf of MJL and
(ii) authority to make prospective substantial gifts on behalf of MJL.
Both he and three siblings each provided witness statements in support. MJL, who was in his sixties, was unmarried and had no children. He had suffered a cardiac arrest ten years previously and was in a persistent vegetative state. His estate was in excess of £17m (the larger proportion of which was comprised in an investment portfolio). His annual income was £123,219 and his annual expenditure was £16,079 resulting in an annual surplus of £107,140. A Statutory Will had been authorised for MJL under which the estate was to be held as to 60% for his siblings in equal shares and 40% divided between charities. Whilst he still had capacity, MJL had benefitted, by standing order, three political organisations and made a lifetime gift to a charitable organisation set up by his family named in memory of his parents. There was no evidence that he had made any significant financial gifts to his family, nor engaged in any inheritance tax planning, before he lost capacity. The Respondent, who had been appointed to act as litigation friend to MJL, accepted that it was in his best interests for the small gifts, previously made to family members and political organisations, to be ratified and that there be authority to continue making standing order donations. The prospective gifts, on the other hand, included not only £1,184,387 out of accumulated surplus income to MJL ‘s siblings and thereafter ongoing gifts out of future surplus income (subject to an annual reserve of £20,000) but also gifts totalling £789,591 out of capital with authority to make ongoing gifts to the charities otherwise entitled and in the same proportions as under MJL ‘s Will. The Respondent did not agree that the Applicant ‘s proposal in this respect was in MJL ‘s best interests, proposing instead that the gift of £1,184,387 and thereafter ongoing gifts of surplus income be made and divided as to 60% between the siblings in equal shares and as to 40% between the charities in the same proportions as in MJL ‘s Will. The Applicant accepted that the reason for making the proposed gifts was that they would reduce the inheritance tax burden on the death of MJL. There was no agreement, however, as to whether, and if so, the degree to which HMRC would accept the proposed payments as being normal expenditure out of surplus income within s21(1) of the Inheritance Tax Act 1984.
Held (accepting the alternative proposal made by the respondent):
Where the Court was considering the authorisation of gifts, affordability was a necessary but not sufficient consideration and, in this case, the proposed gifting would be affordable to MJL. However, the Court was not permitted to rely on default positions, assumptions or generalisations in making a decision about whether gifts which result in any tax mitigation are in the best interests of a particular protected person. Carrying out the balancing exercise, there were factors weighing in favour and against the making of the proposed gifts – all of MJL‘s siblings were wealthy in their own right but it was not accepted that structuring one ‘s affairs in a manner which enhanced the provision that would ultimately be made for family and other beneficiaries affected how that person was remembered. MJL had no children and was therefore not motivated in the same way as his siblings to embark on financial planning. However, evidence clearly demonstrated MJL ‘s commitment to charitable giving and that it would be in his best interests for this continue. Although his political views would have dissuaded him from substantial tax planning, it would not have prevented MJL from some tax planning coincidental to what he perceived as his family and charitable commitments. MJL wanted to do the right thing and, as he was being cared for by the state, he would probably not have wanted to reduce taxes to that state to any great degree.
The Respondent‘s proposals did not represent a different quantum where they differed from the Applicant ‘s proposals; indeed, they represented a point of principle as to whether it was in MJL ‘s best interests for that degree of gifting and tax saving to be achieved before death from capital. Overall, the factors in favour of the proposed gifts supported by the Respondent outweighed the factors against those gifts and the factors in favour of the gifts proposed by the Applicant. Accordingly, the small gifts previously made would be ratified and prospective gifts of £1,184,387 out of accrued surplus income and thereafter ongoing gifts out of future surplus income be made and divided as to 60% between the siblings in equal shares and as to 40% between the charities in the same proportions as in MJL‘s Will.
JUDGMENT DISTRICT JUDGE SARAH ELLINGTON: The issue for determination [1] This is an application for (i) ratification of gifts previously made on behalf of MJL; and (ii) authority to make prospective gifts on behalf of MJL, pursuant to section 18 (1) (b) of the Mental Capacity Act 2005 ( ‘MCA 2005 ‘). [2] FL the …Continue reading "FL v MJL [2019] WTLR 1171"