IHT and Gifts Without Mental Capacity: LPA Limits, Court of Protection Authority, and Statutory Wills
A gift made without mental capacity is void — the 7-year clock never starts and the property remains in the estate for IHT. Attorneys under an LPA can only make small customary gifts. For significant IHT planning on behalf of an incapacitated person, only the Court of Protection can authorise gifts, trust settlements, and statutory wills. Act early — while capacity remains.
Gifting Routes When Capacity Is Lost or Diminished
Gifts made personally by a donor with capacity
For a gift to be a valid PET or CLT for IHT, the donor must have mental capacity to make the gift at the time it is made. Capacity to make gifts is assessed at the time of the gift — a person who lacks capacity generally (e.g. due to dementia) may still have capacity on a good day to make a specific gift. The test for capacity to make a gift (from Re C (Spinster and Mental Patient) [1991]) requires the donor to understand: (1) the nature of the gift and its effect; (2) the extent of the property being gifted; (3) the claims of those who might be expected to benefit (whether or not they are in fact benefiting). A gift made without capacity is void ab initio — it is not a valid gift in law, not a valid PET, and cannot start the 7-year clock for IHT.
Gifts by attorney under a Lasting Power of Attorney (LPA)
A Property and Financial Affairs LPA gives an attorney authority to manage the donor's finances. However, LPA attorneys have very limited gifting powers under s12 MCA 2005: they can only make gifts to persons related to or connected with the donor on customary occasions (birthdays, Christmas, weddings) and to charities — and only if the value of each gift is not unreasonable having regard to all the circumstances and particularly the size of the donor's estate. Attorneys under an LPA cannot: (1) make large PET gifts for IHT planning purposes; (2) make gifts exceeding reasonable customary amounts; or (3) make gifts to themselves beyond this limited authority. To make larger IHT-planning gifts on behalf of an incapacitated person, Court of Protection authorisation is required.
Court of Protection authorisation for gifts
Where an incapacitated person has a significant estate and their estate would benefit from IHT planning (gifts, trust settlements, etc.), the Court of Protection can be asked to authorise those gifts on their behalf. The Court of Protection exercises the decision-making function of the incapacitated person — acting in their best interests (under s4 MCA 2005). In IHT planning applications, the court will consider: (1) whether the incapacitated person would have made these gifts if they had capacity (their previous wishes, values, and attitudes to money and family); (2) whether the gifts are in the person's best interests (including their financial interests and the saving of IHT that would otherwise reduce the estate available for their care and family); (3) the impact of the gifts on the person's ability to meet their own care and living needs. The court can authorise regular PET gifts, lump-sum gifts, trust settlements, and in some cases, full estate restructuring for IHT purposes.
Statutory will authorised by the Court of Protection
Where an incapacitated person has no valid will (or has an existing will that is no longer appropriate), the Court of Protection can authorise the execution of a statutory will on their behalf — a will signed by an officer of the court. A statutory will is executed with the same legal effect as a will signed by the individual personally. The court will consider: (1) the person's wishes, beliefs, and values when they had capacity; (2) the needs and circumstances of potential beneficiaries; (3) the tax efficiency of the proposed will (IHT planning considerations are legitimate factors). A statutory will is particularly relevant where the incapacitated person's circumstances have changed (new partner, estranged beneficiary, large inheritance received) or where IHT planning is clearly in the person's best interests and the court is satisfied the will reflects what they would have chosen.
Frequently Asked Questions
Can an attorney under a LPA make IHT planning gifts?
An LPA attorney has very limited gifting powers under s12 Mental Capacity Act 2005: they can make gifts of 'reasonable' value on customary occasions (birthdays, Christmas, etc.) to connected persons and to charities. This does not extend to substantial IHT planning gifts — an attorney cannot make a £100,000 PET on behalf of the donor, even if this would save IHT. To make larger gifts for IHT planning purposes, Court of Protection authorisation is required. The restriction is a safeguard against attorneys exploiting their position at the donor's expense. Attorneys who make unauthorised gifts exceeding the s12 powers face liability for breach of duty and potential personal liability to repay the gifts.
What is the IHT position if a gift is made without capacity?
A gift made without capacity is void — it has no legal effect. The property purportedly gifted is still part of the donor's estate. For IHT: (1) the 7-year PET clock does not start (there was no valid gift); (2) on death, the property is in the donor's estate and subject to IHT; (3) if the property was received by the intended recipient and has already been spent, the estate may have a claim against the recipient for recovery — and if the property cannot be recovered, the estate still includes the value for IHT but there is no asset to pay it. Capacity disputes at death are complex: executors may need to investigate the circumstances of gifts made in the years before death, particularly where the donor was known to have cognitive decline.
How does the Court of Protection approach IHT planning applications?
The Court of Protection approaches IHT gifting applications by considering the incapacitated person's best interests under s4 MCA 2005. IHT saving is a legitimate consideration: if the person would likely have died leaving an IHT liability that could have been reduced by lifetime gifts, the court recognises that authorising gifts is in their financial best interests (preserving more of the estate for their family). The court will typically require: (1) a comprehensive medical report confirming lack of capacity; (2) evidence of the person's pre-incapacity wishes regarding gifting (e.g. they regularly made gifts to family during their healthy years); (3) a financial plan showing that the proposed gifts do not threaten the person's ability to fund their own care; (4) evidence that the proposed beneficiaries of the gifts are appropriate; (5) expert IHT evidence showing the benefit of the proposed gifting programme.
When does the 7-year IHT clock start for Court of Protection authorised gifts?
The 7-year clock for a PET (or the effective date of a CLT) starts from the date the gift is actually made — not the date of the Court of Protection order authorising it. Where the court authorises a programme of regular gifts, each gift starts its own 7-year clock from the date it is made. The date of the court order authorising gifts in principle is not the transfer date — the individual gift transactions are the transfer events. Executors must therefore obtain precise records of when each authorised gift was actually completed (transferred to the recipient), as these dates determine whether the PET is charged on death (within 7 years) or fully exempt (7+ years before death).
What is a 'statutory will' and when is it needed?
A statutory will is a will made on behalf of an incapacitated person by the Court of Protection under s18(1)(i) MCA 2005. It is needed where: (1) the person has no valid will and the intestacy rules would produce a poor result (e.g. a large IHT bill, or assets passing to estranged relatives rather than carers); (2) the person's existing will is no longer appropriate (e.g. they have divorced, a beneficiary has died, or their estate has changed substantially); (3) IHT planning through will structure (NRB trusts, charitable gifts, specific legacies) would benefit the estate. The Court of Protection approves the statutory will after considering evidence of what the person would have wanted and what is in their best interests. Once sealed by the court and executed by the Public Guardian (or a judge), a statutory will is legally binding.
Can IHT planning be done for someone with very early-stage dementia who still has capacity?
Yes — and this is strongly advisable as a matter of urgency. A person with early-stage dementia may still have legal capacity for financial decisions — capacity is decision-specific and time-specific. While capacity remains, the person can: (1) make direct gifts as PETs; (2) settle a trust; (3) execute a new will (or update existing provisions); (4) execute lasting powers of attorney (before capacity is fully lost); (5) undertake structured IHT planning with professional advice. As dementia progresses, capacity will be lost — at which point only LPA attorneys (limited to small gifts) or the Court of Protection (for larger gifts) can act. Early-stage planning (while the person has capacity) is far more effective and less costly than a Court of Protection application later.
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