An essential part of financial planning is ensuring that a trusted representative can continue to manage a person’s affairs in the event of the worst happening. Establishing a lasting power of attorney, however, can set limitations on inheritance tax (IHT) planning.
A lasting power of attorney (LPA) is a legal document that gives trusted appointees the ability to make decisions on the behalf of someone in the event they are no longer able to do so, such as following a serious accident or illness.
It is an essential part of financial planning and relatively simple to set up. It costs £82 to register an LPA with the Office of the Public Guardian, in a process that can take up to 10 weeks. Of the two available kinds, a property and financial affairs LPA gives a designated attorney the power to make decisions about money and property, such as those related to collecting a pension or selling a home.
What makes a LPA so essential is that there is no automatic right for next-of-kin to make decisions on a person’s behalf. But it does not represent a complete solution when it comes to planning for the future as, once a LPA is registered with the Court of Protection, there are limits to what can be achieved when it comes estate planning.
While an attorney can give presents on 'customary occasions', including weddings and birthdays, and are permitted to continue making donations to charities if they have been previously supported, they don’t however have the authority to make significant gifts on behalf of the person who appointed them. Since this is often an effective method of reducing the size of an estate in order to minimise IHT, this can represent a problem.
Even if attorneys are specifically instructed to in the LPA document, the rules specifically do not allow for gifts intended to reduce inheritance tax liability to be made on the person’s behalf. An attorney must act in the interests of the person who nominated them, meaning that giving away their money is not permitted.
In order to make gifts such as these requires the involvement of the Court of Protection. Application fees and Appeal fees are both £400 at the time of writing while the Hearing fee is £500. This hardly represents a cheap and efficient option.
If an individual has registered a LPA with the Court of Protection, their plans for their estate can’t be easily implemented and increase the chances of falling foul of IHT. A rate of 40% inheritance tax is payable on assets above the nil rate band, which has been frozen at £325,000 until 2020-21, and a record figure of £4.7bn was reported in IHT receipts in 2015/16.
There are methods of reducing future potential IHT liability and the earlier estate planning starts, the more effective it is likely to be. For example, whilst a Power of Attorney is not permitted to gift significant sums of assets (either directly or with the use of Trusts) it may be appropriate to invest in shares that qualify for Business Property Relief (BPR). Once these shares have been owned for at least two years, they become exempt from Inheritance Tax, provided they are still owned at the time of death. This can provide an alternative to giving away sums of money ahead of time in order to reduce the value of an estate. BPR-qualifying shares do not trade on main stock exchanges, however, and can potentially represent a riskier and more volatile option.
This highlights the importance of long-term financial planning. It is also worth noting that setting up other gifts such as school fees for grandchildren or interest-free loans to family members are not permitted under the current LPA rules. Attorneys are additionally unable to make changes to the donor’s will so the best option is to speak to a qualified financial planner as early as possible in order to manage future financial expectations.
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