Analysis
This was an application by the applicant, PBC, the son and attorney under a lasting power of attorney of the patient, JMA, to authorise various gifts exceeding £7m in value. The purpose of the gifts was to achieve a reduction in inheritance tax (IHT) liability. JMA‘s total assets were estimated to be worth around £18,650,000, held in the form of investments and five paintings.
JMA was 72 years old, suffered from early onset dementia, and required full time care. She was unable to converse and did not recognise PBC or her care staff. It was agreed (and found) that she did not have capacity to make decisions about making gifts. In her GP‘s view, her life expectancy was up to 10 years, but it was thought more likely that she would only live 3-5 years.
JMA‘s wealth derived from her late husband, RA, who had left her his estate in his will. The default provisions in RA ‘s will (which would have operated had JMA not survived him) provided for legacies to his brothers, nieces and nephews, persons working for RA‘s company, and six charities. RA‘s will expressed a wish that JMA consider making similar or lesser gifts to those who would have received those legacies had she not survived him.
Before she lost capacity, JMA had also executed a will. This gave specific legacies to her sister (JG) and JG‘s family, pecuniary legacies to her grandson (JAA) and each of 8 charities, and left the residue to PBC. Contemporary attendance notes indicated the motive for these gifts, including that four of the charities were included because the money had come from RA and RA had been fond of them. In fact, all six charities named in RA‘s will were named in JMA ‘s will. The ‘limited benefit‘ to JAA was explained based on limited contact with him.
During her lifetime, JMA had provided £586,499 for the purchase of a home for PBC to enable him to move to a better area. She had later given him another property and £50,000 ‘to help maintain the properties‘. She also gave £15,000 to her sister, JG. Two attendance notes from the time of the cash gifts gave contradictory accounts. An earlier one indicated that JMA felt she had been ‘very remiss ‘ when it came to cash where PBC was concerned and that she felt she should give him some cash to set him up financially. The subsequent one, however, stated that PBC had received a lot of money in the past and that the £50,000 was intended to be the last payment to assist him and that he needed to know that it was the end of financial support from JMA. Mr Morris ‘evidence was that in fact she had only intended to withhold further gifts ‘for a period‘.
JMA had also given each of the six charities named in RA ‘s will gifts of £10,000, and had given JG and her husband a further £5,000. She had also consented to the trustees of a trust created by RA distributing the fund to RA‘s brother (MA). Evidence from Mr Morris, JMA‘s advisor, indicated that she was not close to RA ‘s family other than MA (who had since died) and that it had ‘generally been clear‘ that she did not wish to give them money, and that she was not interested in benefiting the people who had worked for RA ‘s company since they were not in contact with her.
There was evidence that JMA and RA had taken steps to reduce their tax liabilities during their lifetime. These steps included transferring £3m into a bond to reduce her income tax liability, and structuring the gift of a property to JBC by first transferring it into a trust to obtain holdover relief from capital gains tax.
The parties had agreed amongst themselves that, subject to court approval, the following steps should be taken:
a. A statutory will should be executed replicating the existing will but adding a £100,000 legacy to the Alzheimer ‘s Society, provisions ensuring that the charitable gifts were sufficient to ensure the estate was subject to IHT at the lower rate of 36%, and a provision that in the event of PBC predeceasing JMA, JAA and the charities should bring into hotchpot any gifts made to them under the court order;
b. A £6,000,000 gift be made to PBC;
c. Gifts of £50,000 be made to each of the charities named in the existing will and to the Alzheimer‘s Society;
d. A gift of £422,800 plus tax be made to the trustees of a discretionary trust under which JAA was the primary beneficiary; and
e. A gift of further chattels be made to PBC.
PBC also agreed to enter into covenants to make a will providing that if he predeceased JMA, JAA and the charities named in JMA ‘s existing will would receive the sums they would have received if the proposed gifts to him had not been made.
It was anticipated that the IHT saving due to the proposed gifts would be between £600,000 (if JMA died immediately afterwards) and £3.2m (if JMA survived until March 2025). The consequence for JMA would be to reduce her available assets to c £10m. There was no suggestion that she would have any understanding of the proposals such as might give her any pleasure or cause her any anxiety.
Held (granting the application):
The exercise of the court ‘s power to make a will and gift under section 18 of the Mental Capacity Act 2005 (MCA 2005) is subject to the requirement in s1(5) MCA 2005 that it be in the best interests of the person who lacks capacity. When determining a person ‘s best interests in line with s4 MCA 2005, the concept should be understood as a broad one (applying An NHS Trust v MB [2006] 2 FLR 319 and SSHD v Skripal [2018] COPLR 220), and should not be restricted to the person ‘s self-interest (applying Re G(TJ) [2010] COPLR Con Vol 403). While a holistic approach should be applied (applying Aintree University Hospitals NHS Foundation Trust v James [2014] AC 591), this did not amount to a ‘substituted judgment ‘ test (applying Briggs v Briggs (no 2) [2017] 4 WLR 37) and should not be based on a ‘presumptions ‘ or ‘starting points ‘ (applying Watts v ABC [2017] WTLR 159, [2017] 4 WLR 24).
The fact that a gift is affordable is a necessary but not sufficient consideration – there is no expectation that it is in a person ‘s best interests to make gifts of their surplus wealth during their lifetime (paragraph 64). The future needs of the protected person should be considered on a cautious basis (following Re G(TJ) [2010] COPLR Con Vol 403). On the facts, the proposed gift would leave JMA with sufficient funds to meet her conceivable needs.
There is no ‘default position ‘, ‘reasonable expectation ‘, ‘assumption ‘, or ‘generalisation ‘ in favour of measures to mitigate tax liability (para 65). This would run counter to the underlying rationale and purpose of the MCA 2005 which requires a fact-sensitive approach to the ‘best interests ‘ test (following Watts v ABC [2017] WTLR 159, [2017] 4 WLR 24).
Payment of IHT by the estate of JMA ‘s death would have no direct impact on her. IHT mitigation could only meaningfully be considered in the best interests balancing exercise as a mechanism which either supports or goes against the particular individual ‘s wishes and feelings, values, and beliefs about gifting and tax planning (para 68). On the facts, this factor was subsumed in the positive factor of enhancing benefit to those whom JMA wished to benefit.
While JMA had no discernible wishes in respect of the proposed gifts or mitigation of IHT, in the past she had wished to make gifts to PBC and the charities within the means available to her. Her will showed that she wished to continue to benefit them and JAA in due course. Her past transactions also showed that while she did not actively turn her mind to post-death tax planning, she was open to such measures (para 69). Mr Morris ‘ interpretation of the attendance note was the preferable one – while she had indicated that financial support to PBC should be at an end, this did not imply a decision to never benefit him again during her lifetime. Further, JMA ‘s circumstances had changed significantly, and the gifts under consideration were not in the nature of ‘financial support ‘. What JMA actually did when she had capacity carried greater weight as a guide to her wishes than what she was recorded as saying in a single attendance note (para 70).
The wishes expressed in RA‘s will are a factor which JMA would be likely to consider if she were able to do so. However, she had already considered them and made a capacitous decision to make gifts to the charities but not to the individuals (other than by consenting to the release of funds from an inter vivos trust). JMA ‘s capacitous decisions were the best guide to how the court should consider RA ‘s wishes in the context of the application (para 72).
It was also relevant that the views of relevant persons (including the Official Solicitor and Mr Morris) as to JMA ‘s best interests were unanimously in favour of the proposal. While PBC ‘s application was self-serving, it was not improperly brought and JMA had appointed him as attorney which indicated a significant degree of trust and faith in him.
In all the circumstances, the factors in favour of the gifts outweighed the factors against. The proposals were therefore in MA ‘s best interests and would be authorised.
JUDGMENT HILDER SJ: The issue for determination [1] PBC is the son of JMA, and was appointed as her sole attorney for property and affairs by a Lasting Power of Attorney (LPA) executed on 5 August 2010 and registered by the Public Guardian on 16 December 2010. He seeks the authority of the court to make from JMA ‘s …Continue reading "PBC v JMA & ors [2019] WTLR 1193"