Legal tensions

When the Mental Capacity Act 2005 (MCA) was enacted and with it a new test of capacity, it raised a lot of uncertainty. It was unclear whether the new statutory test would apply to any claim concerning a lack of capacity, including those where a pre-existing common law test already existed.

Helpful clarity has now been provided by the case of Kicks and another v Leigh [2014] EWHC 3926(Ch). Judge Stephen Morris QC (sitting as a deputy High Court judge) conducted an analysis of the interplay and application of common law tests and the MCA.

Facts

The transfer of the money generated by the sale of Mrs Joyce Smith's property (now deceased) to one of her daughters and husband during her lifetime was challenged by the beneficiaries of one of Mrs Smith's daughter's, who herself had died. The claim was advanced on grounds that (i) Mrs Smith lacked capacity to make the gift/transfer; and/or that (ii) Mrs Smith's gift was effected by the defendant recipient's undue influence over the deceased.

Statutory test of capacity

Section 2 (1) of the MCA sets out the statutory test for establishing mental capacity: "For the purposes of this Act, a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain."

Under section 3 (1) of the MCA, a person is unable to make a decision if he is unable to:

• Understand the information relevant to the decision.

• Retain that information.

• Use or weigh that information as part of the process of making the decision.

• Communicate his decision (whether by talking, using sign language or any other means). 

Common law test of capacity

In common law, the principles for establishing mental capacity to make lifetime gifts are set out in Re Beaney [1978] 1 WLR 770.

The test for capacity for lifetime transactions is whether, having regard to the nature and size of the transaction in question compared to the value of the donor’s overall assets, the donor would have understood the effect of the transaction if the consequences had been fully explained to him.

For example, if the transaction is small, then a lower level of understanding would suffice to make the transaction valid. If the transaction is larger, then a greater degree of understanding would be required.

Findings

• The opening words of the MCA test of capacity, “for the purposes of the Act”, (section 1(1)) indicates that it is a test to be applied in relation to matters specifically arising under the Act itself, which was focused on prospective decision making. It does not include a court’s retrospective consideration of the capacity to make a lifetime gift.

• It was not clear whether the statutory test followed the common law principles of Re Beaney. It appeared not to (because it expanded the test) but if it did, then Re Beaney should be followed. To the extent that the statutory test may be applicable, it must be applied alongside the common law test.

• There was some doubt about the burden of proof in the statutory test, but the court considered that the burden would fall on the party alleging incapacity, as in the common law test.

Due to the case of Kicks and another v Leigh, it is now clear that the common law test should be the applicable test. It has also clarified that the extent that the statutory test has any application, it should also be applied alongside the common law test.

This mirrors findings in other cases concerning retrospective analysis of lifetime decisions, where the incapacity of the individual concerned is impugned, such as in cases where the validity of a will is being challenged.

Lloyd Junor is a senior associate at Thomas Eggar

He writes the regular in-practice article on wealth structuring for Private Client Adviser