Techzone

A client's loss of mental capacity can have a devastating impact on the financial plans which have been put in place. A power of attorney can ensure that where those plans need to be adapted, they have flexibility when it's needed most.

Data from the Office of the Public Guardian (OPG) shows that the number of 'lasting powers of attorney' registered last year increased by 20% on 2021, at just under 850,000. This shows that the importance of putting a power of attorney in place is beginning to be understood. However, it is equally important to understand what restrictions that they place on what an attorney can do.

The key principle overarching all duties performed by an attorney under a lasting power of attorney (LPA), or continuing power of attorney (CPA) in Scotland, is that they should act in the best interests of the donor, and no one else.

Advisers need to aware of how any restrictions may affect the advice they give and ensure that their recommendations match the donor's best interests.

Gifting

Generally, an attorney cannot make any meaningful gifts to save the donor IHT (the donor being the person giving authority to the attorney to act on their behalf). These are not normally viewed as being in the donor's best interests – after all they could reduce the resources available for the donor's future needs, such as long-term care.

Of course, the donor can still make gifts themselves if they still have full capacity. If providing for family members and/or saving IHT is important to them, they should consider making gifts while they are able.

Once mental capacity has been lost, such gifts will no longer be possible in England and Wales without application to the Court of Protection. There will be time and cost associated to this, with no guarantee that authority will be granted. It's unlikely that this can be avoided by including powers in the POA document itself. Such instructions could result in an application being rejected by the OPG.

In Scotland the situation is a little different as the CPA document is usually drafted and certified by a solicitor (in England and Wales, the application form is provided by the OPG and does not need to be certified by a solicitor). Specific powers are given to the attorney with regards to investments and financial affairs, including any power to make gifts for IHT. Applications must still be approved by the OPG (Scotland) before an attorney can act. Where gifts are made, they must still be considered to be in the donor's best interests. Attorneys in Scotland should always check the CPA before making any decisions.

Gifts that are allowed

The gifts an attorney can make without application to the COP are limited to occasions such as birthdays and Christmas, or to charities the donor may have previously supported. The value of those gifts must be reasonable based upon the individual circumstances. So again, it may not be reasonable to make gifts even these circumstances if, as a result, the future financial needs of the donor may be compromised.

Attorneys should also be mindful that any gifts that are made, even with COP approval, could still be regarded as a 'deprivation of assets', and therefore included in the local authority assessment for any contributions towards the cost of care should they need to go into a care home full time.

Investing

A power of attorney is important to ensure that the donor's investments can continue to be managed flexibly in the donor's best interests. It is essential that the donor should continue to have a choice of investment wrappers such as ISAs, investment bonds and OEICs. Any investment must be owned by the donor, but the attorney can sign on their behalf.

In the absence of an attorney, investments can't be changed or new wrappers opened which may not be good news, particularly if the donor's loss of capacity dictates a different investment strategy to meet future needs.

While an attorney generally cannot delegate decision making to someone else, they can seek professional help from a financial adviser, solicitor, accountant etc. to help with their decision making.

Discretionary fund managers

It's not unusual for an individual to employ the services of a discretionary fund manager (DFM) to manage their investments. This is effectively a delegation of decision making. There has been uncertainty over whether an attorney can continue with this contract once the donor client has lost capacity, and indeed whether they can choose to delegate investment powers by choosing a new DFM. The original guidance from the OPG was that this could only be done if there was an express provision in the power of attorney.

It is now understood that an attorney may instruct a discretionary investment manager to continue, or engage the services of a new DFM, without express wording in the power of attorney. This was confirmed verbally to the Society for Trusts an Estate Practitioners (STEP) by OPG last year.

However, OPG guidance currently states that 'where you already have investments that are managed on your behalf by an investment professional (known as discretionary investment management) or would like to allow your attorneys to use any scheme involving discretionary investment management, you should consider taking legal advice on whether it is necessary to make specific provision for this in your LPA'. This appears to be a 'belt and braces' approach in case a DFM may refuse to act without a specific provision. But on the basis that a DFM is happy to act in principle, there should not be an issue.

In Scotland, the CPA should still be checked to see what investment powers the attorney has been given.

AIM shares

Investment can be made in unquoted shares or portfolios, but only if it something the donor may have done themselves, and the risk is acceptable given the donor's other investments, present circumstances and future needs.

Attorneys may think that there is also an IHT planning opportunity given that qualifying AIM shares qualify for business property relief once held for two years. However, investing substantial amounts in this way to save IHT could come under scrutiny from either the OPG or the beneficiaries of the donor's estate, particularly if there is a fall in value of those shares.

Financial planning and meeting income needs

The onset of ill-health can drastically change retirement income needs. For some, as they become less active they may need less income to live on. At the other end of the scale, it could require additional expenditure to make adaptations to the family home or even the need to enter residential care.

Having an attorney in place allows greater choice over how the donor's needs can be met tax efficiently from savings which may typically include pensions, ISAs, OEICs and bonds. For example, if the donor was taking a regular withdrawal from their flexible pension, but also had savings in a bond, it may be possible to stop the pension payments, potentially freeing up £18,500 of allowances. These could then be used to take bond gains without a tax charge.

If the client also had savings in OEICs or unit trusts, additional funds could be released such that gains fall within the donor's annual CGT exempt amount. If still further funds are needed, then the attorney might look towards any ISA savings, or even any available tax free cash from the donor's pension.

The absence of a registered power of attorney when needed can mean that there is little flexibility when it comes to meeting the donor's income requirements. It may not be possible to start, stop or vary pension withdrawals from a flexible pension. It may also mean that other lifetime savings are not accessible. As a result, a client may not be able to make the most of their tax allowances and end up paying more tax than necessary. In turn, this could mean that savings don't last as long as they might otherwise. With restrictions on gifting, it could also preserve a larger estate for their families.

Summary

Where clients are in good health, it's important to act sooner rather than later to safeguard their futures. This could mean ensuring their pension provides all the flexibilities necessary to make the most of tax allowances in the future, and making gifts to save IHT if that is what they desire and can afford it.

Registering an LPA or CPA ensures that the attorneys can have the freedom to act in the donor's best interests once capacity has been lost – choosing appropriate investments and providing income and capital when needed in a tax efficient way.

While it's perhaps human nature to leave these decisions for another day, acting sooner may save time, money and perhaps a lot of stress in the long run.