Much is written about Lasting Powers of Attorney (LPA) and I would agree that everyone should have one. However, I have come across an issue that needs to be borne in mind by anyone holding (or advising on) a LPA who needs to carry out some tax planning or investment on behalf of someone for whom they are an attorney. As is my wont, a little story ensues.
Jack Hubbard holds a LPA for his old mother, Jill Hubbard. It allows Jack to manage her property and financial affairs. Mrs. Hubbard is a wealthy woman but has been losing the plot over the last few years. She has moved into residential care and her house has been sold. She has an income that just about covers her expenses, but it would be useful to create more and for her to enjoy a surplus.
Jack is also concerned that she has a significant inheritance tax liability which he would like to mitigate and, as he is concerned about his mother’s longevity, he would like to have something that acts quickly. He takes advice.
Andy Adviser tells Jack, “You can’t give away money as that goes against the interests of your mother. So, for you, I would suggest that you consider Business Relief schemes which effectively remove any investment in them from the estate for IHT purposes after two years of ownership. There are quite a few to choose from ranging from investments in the Alternative Investment Market to asset backed schemes investing in such things as forestry, clean energy, secured lending etc.”
“Would they pay an income to my mother?” asks Jack.
“They would indeed,” responds Andy, smiling. “Do you have a copy of your LPA with you?”
Jack dips into his pile of papers and pulls out a copy and gives it to Andy. It only has one coffee ring on it.
Andy reads it and his brow furrows. “We may have a problem.”
Jack is surprised and asks, “How can that be? It is a standard document from the Office of Public Guardian.”
Andy responds. “That is the problem. It does not grant you, the attorney, the ability to delegate investment decisions to a discretionary investment manager. All these Business Relief schemes are run by discretionary investment managers. It also means that you could not go to, or continue with, any discretionary manager to handle Mrs Hubbard’s investments, even if she has used them herself, and that includes the likes of well-known stockbrokers or the banks’ discretionary investment offerings. I can still help you invest in our advisory service, but there will be no IHT saving.”
Jack did not like the sound of this as he realised that his inheritance would be reduced by 40%. He asked, “What can I do?”
“If your mother still has the mental capacity then you could get a new LPA set up. If not, then you will have to approach the Office of Public Guardian or the Court of Protection to have the existing LPA amended. That will not happen quickly.” Andy looked serious as he emphasised the last sentence.
Jack decided to get the LPA altered which took the best part of a year. Old Mrs Hubbard died 18 months later, and her estate paid an eye-watering amount of IHT. Jack went looking for someone to blame.
Peter Rutherford is a Director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 peter.rutherford@rutherfordhughes.com
