Attorneys and inheritance tax saving investments

For the time being at least business property relief (BPR) continues to be a generous inheritance tax (IHT) relief which can reduce the IHT liability to nil on business property that has been owned for at least two years. Individuals wishing to reduce their estate’s IHT liability are sometimes advised to consider investing in AIM shares which have the advantage of benefitting from BPR. For the mentally capable investor this is just a matter of weighing up their adviser’s advice and deciding whether to commit funds to an AIM portfolio. However, if the investor in question is mentally incapable, with attorneys acting on their behalf, the situation is much more complex with multiple factors that should be considered.

IHT mitigation and incapable individuals

The most common route taken to reduce IHT liability is lifetime gifts either into trust or outright to an individual in the hope of surviving seven years from the gift. However, this is a restricted option for attorneys as a Lasting Power of Attorney only gives the attorney limited power to make gifts and anything more extensive requires court permission which would not necessarily be forthcoming.

Best interests

A capable person is able and entitled to make decisions which are not in their best interests but under the Mental Capacity Act 2005 attorneys are required to always act in the donor’s best interests. In addition, attorneys are required to take into account the donor’s past and present wishes and feelings and beliefs and values. Attorneys must also consider whether a conflict of interest arises between the attorney and the donor as the action in question may then necessitate a court application for approval. The purchase of AIM investments decided by an attorney who is also a beneficiary of the donor’s Will could be regarded as just such a conflict of interest given that the IHT advantages will benefit the beneficiaries of the donor’s estate rather than the donor during their lifetime.

The potential investments

The characteristics of AIM investments will have to be considered to determine whether a purchase would be in the donor’s best interests. The nature of AIM investments is that they may well have a higher risk profile than other investments, could have a lower income return, may not be as liquid as other investments, and are potentially vulnerable to the loss of BPR which would remove the attraction of IHT mitigation.

Wishes and feelings; beliefs and values

The donor’s past attitudes towards more risky investments and in relation to tax planning and mitigation should also be considered as part of the balancing of factors relevant to whether the investment should be made.

Case Study: Rose

Rose is aged 70 and due to mobility problems and vascular dementia requires residential care. She is single with total assets of £600,000 including her flat and, aside from income from her investments, she receives a DSS pension and Attendance Allowance at the basic rate. Before she lost capacity Rose chose an expensive care home intending to top up the fees from her capital as required. The IHT liability on her estate currently stands at £25,000.

Her nephew Will is a residuary beneficiary of Rose’s estate and her attorney. He is advised that investment of £100,000 in an AIM portfolio would reduce Rose’s IHT liability to nil after two years. Will is aware of the potential conflict between his interests and those of his Aunt in making this decision. Rose has always been careful with money and conservative in her investments. Her solicitor advised her about IHT planning and mitigation measures when she made her Will and she expressed no interest in pursuing this saying that any inheritance would be a bonus for her nephew and niece.

After careful consideration, Will decides that investment in AIM shares would not be in his Aunt’s best interests. If Rose had a bigger income and a history of pursuing tax planning the decision could potentially be different. Whatever the decision, the decision-making process should be carefully documented.