A power of attorney is a legal document by which an individual (the "adult") appoints a person (the "attorney") to act on their behalf, in relation to their finances or personal welfare. The financial powers can be wide-ranging and may allow the attorney to make gifts on behalf of the adult.
The ability of an attorney to make gifts can be a valuable tool for estate planning, particularly for mitigating any potential inheritance tax ("IHT") liability arising on the adult's death. However, several important considerations must be taken into account by an attorney before making gifts.
What constitutes a gift?
The definition of gifting when acting in the capacity of an attorney is broader than one might initially think. The most common example may be giving someone cash or a present to celebrate a birthday, Christmas, or some other customary occasion. It can also include:-
- Making donations to charity
- Paying someone's school or university fees
- Allowing someone else to live in the adult's property rent free or at a reduced market rate
- Selling the adult's home below market value
- Creating a trust which comprises of the adult's property
- Offering an interest free loan from the adult's funds
Does the attorney have the power to make a gift?
The attorney must determine if the power of attorney expressly authorises them to make gifts from the adult's estate on the adult's behalf. If it was not included when the power of attorney was signed, and the adult subsequently loses capacity, this cannot be rectified. In this event, the only remedy would be for the attorney to apply to the Sheriff Court for permission by way of an Intervention Order or Guardianship Order.
If no such power was included, and the attorney has made gifts, these will be considered legally void. There is currently no legal mechanism to retrospectively validate such gifts. This can pose a problem for the attorney, for if they are unable to recover the gifted asset, they may be held personally liable to reimburse the adult's estate. If the gift is discovered after the adult dies, HMRC may treat the gift as part of their estate for IHT purposes.
Should the attorney make a gift?
The Adults with Incapacity (Scotland) Act 2000 ("AWI Act"), the main piece of legislation which governs the use of powers of attorney in Scotland, states that any action taken by an attorney must be for the benefit of the adult. At first glance, reducing an individual’s estate may appear contrary to their best interests. However, there are circumstances in which this may be justified.
The AWI Act requires attorneys to take into consideration the past and present wishes of the adult. If the adult had a history of making gifts, either to individuals or charity, before they lost capacity, it is reasonable for an attorney to presume that they would wish for this practice to continue. The same rationale applies if the adult was already gifting as part of an IHT planning strategy.
The attorney should also consider the value of the gifts in proportion to the size of the adult's estate, taking into account living expenses including any existing or potential care home costs.
Generally speaking, a gift will be deemed appropriate if it aligns with the adult's past habits, is of modest value and does not compromise their standard of living.
Guidance for attorneys
The Scottish Government’s Code of Practice (the "Code") provides essential guidance for attorneys in carrying out their role and is something all attorneys should take time to familiarise themselves with. The Code sets out standards that must be met once the attorney begins to act, with particular emphasis on adhering to the principles set out in the AWI Act.
An attorney owes a fiduciary duty to the adult. This means they are in a position of trust and should only use the powers granted to them in a way which is in the best interests of the adult. Attorneys must not take advantage of this position, nor should they allow personal interests, or the influence of others, to conflict with their duties. They must not profit or obtain any personal benefit from their role, except where the Power of Attorney expressly authorises the receipt of gifts. As a matter of good practice, attorneys should keep clear records of any gifts made.
Next steps
If you are an attorney seeking further advice in relation to making gifts, or if you are considering making a power of attorney yourself, please get in touch and one of our experts would be delighted to assist.
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Senior Solicitor
