If so Read on as it may be time to change to a Lasting Power of Attorney.
In this article from our Wills, Trust and Probate team we explore the differences and the advantages between an Enduring Power of Attorney (EPA) and a Lasting Power of Attorney (LPA).
When it was proposed back in 2006 to change the law on Powers of Attorney and do away with the Enduring Power of Attorney (EPA) in favour of the Lasting Power of Attorney (LPA) there were many people who were encouraging clients to sign an EPA as they were cheaper and simpler than the replacements. Many people came to us and other solicitors up and down the country to make an old style EPA. At the time the principal advantage was that the costs were minimal in terms of creation and only if you lost capacity was the document then ever registered.
The perceived disadvantage with the property and affairs LPA was that all the costs were up front. The document had to be registered before it could be used. It therefore appeared to be sensible to try and defer the cost by doing the EPA before the law was changed.
What happens if the Donor loses capacity?
What was not apparent at the time is that there were some unforeseen and hidden consequences that came out from relying on the old law. Typically this boils down to the area of giving and what happens if the Donor (owner) of an EPA loses capacity. Under the Enduring Power of Attorney Act 1986, as originally envisaged, EPA’S operated in a fairly black and white way. If you were capable it did not need to be registered but if the Attorneys had reason to believe that you were, or were becoming mentally incapable of managing your property and affairs they were under a duty to register that EPA. The actual wording is quite crucial. The Act says:
“if the donor is or is becoming mentally incapable of managing their property and affairs”.
In many respects it is a slippery slope. Somebody can be diagnosed with early onset Alzheimer’s and thus be “becoming incapable”, but still capable of managing their property and affairs. At some stage on that downwards slope the Attorney is under a duty to register that document.
The consequences of registration of an EPA
The issue occurs when that document is registered. Under the old Enduring Power of Attorney law (which was carried into the new Mental Capacity Act 2005), once the EPA is registered the donor is deemed at law to be incapable of managing and administering their property and affairs even if they are in fact still capable. An attorney cannot accept instructions from that donor since to do so is outside their powers as the Donor is deemed incapable. The Enduring Power of Attorney Act is very black and white. The Mental Capacity Act is full of grey in that it works on a different presumption i.e. that of a presumption of capacity and, the donor of an LPA is only deemed to be incapable of managing their property and affairs if all practical steps to help them make that decision have failed. Consequently that area of grey enables attorneys to be able to talk to donors and then assist them to make decisions.
Why does this matter?
Predominantly it is in the area of gifts. If a donor is tax planning: making regular gifts of £3,000 annual IHT allowances to their children and/or grandchildren; or indeed making gifts out of surplus income, then the registration of the EPA at the onset of incapacity prevents the attorneys from carrying on with those gifts as being outside the scope of their powers. If they wish to continue them post registration then they must make an application to the Court of Protection for permission to continue the gifts which the donor has previously made. Whilst the Court will, usually, readily grant permission, there will be a significant amount of paperwork that will need to be prepared and sent off to the Court in order to obtain that approval, provided it is in the Donor’s best interests. In addition it will incur significant legal fees as well as a medical report and Court fees etc. in order to get the appropriate order made by the Court.
Why is Court approval important?
Predominantly the reason why this is important is that without Court approval, on the subsequent death of the donor, the Inland Revenue may, if they are aware that gifts have been made with a registered EPA, ask the question whether there was permission for those gifts. If the evidence cannot be produced, they will treat the donor’s estate in respect of any gifts made without a court order as being due back to the donor’s estate. That has the effect of nullifying any gifts that were purportedly made under that registered EPA, even if more than 7 years has passed.
Generally speaking, even though it is accepted that taxpayers are able to give away, within the legislation, say £3,000 in any one tax year and make gifts out of surplus income, the effect of this is to penalise wealthy donors who are incapable and who have an EPA.
If you are making gifts should you switch to an LPA?
Consequently if it is likely that you are going to be making gifts as part of some ongoing tax planning then you really should consider whether to obtain a new property and affairs LPA rather than continuing with the EPA. We are not saying that the property and affairs LPA would prevent an application to the Court for approval in all cases, but what it does do is contain a much greater power for attorneys to assist the donor to make gifts on their behalf than does the old EPA. Indeed, once the presumption that the donor is capable cannot be made out, the attorney (under an LPA) would then still have to make an application to the Court to be able to continue to make gifts out of the donor’s funds. Where the LPA helps is with those donors who have diminished capacity, but who have not lost their capacity completely.
The cost of preparing a new property and affairs LPA is significantly smaller than the cost of an application to the Court of Protection and would in most cases be cheaper to achieve.
An LPA could defer the need to apply to the Courts in a significant number of cases.
For further help and advice on completing and registering an LPA please contact Henry Anstey.
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