Tied up

There has been only one reported decision on an application to make a lifetime gift since the Mental Capacity Act 2005 (MCA) came into force: Re G(TJ) [2010] EWHC 3005 (COP). A recent decision of Senior Judge Lush, published under the anonymised name of Re JDS, now provides further guidance on the approach that the court will take when considering gift applications.

Settled gift

The application related to a young man referred to in the judgment as James who had received substantial damages for clinical negligence. It was an application by his deputy for authority to make a settled gift primarily in favour of James’ parents. The purpose of the gift was to reduce the amount of inheritance tax (IHT) that would otherwise be payable upon James’ death.

James was an only child. He was aged about 20 at the time of the hearing. He had cerebral palsy as a result of complications at the time of his birth. Proceedings were brought against the relevant health authority and were compromised for £2,090,000, of which £1,611,222 was attributable to James’ future care needs. James lived with his parents in a house bought from the damages award and held for James in the names of the deputy and the parents as trustees.

In 1998, a medical report had reckoned that James was likely to survive into his late twenties or early thirties. However, subsequent reports indicated that his life expectancy was likely to be greater, with survival into his late forties or even early fifties possible if appropriate care should continue.

The deputy, with the support of James’ parents, made an application to transfer £325,000 into what was described as a ‘flexible power of appointment trust’. The intention, as set out in the application, was that a substantial IHT saving would be achieved if James should survive seven years.

The deputy relied on several grounds in support of the application. First, there was every reason to believe that James would wish his parents to be spared of the IHT liability. Second, the likelihood was that James’ parents would survive him. Third, in the very unlikely event that James should marry or have children, the IHT saving would benefit his wife and/or children. Fourth, the deputy relied on a report by an independent financial adviser stating that the proposal was tax efficient and did not fall foul of the reservation-of-benefit provisions. Finally, the deputy relied on the proposition that James should be in the same position as anyone else when it came to being at liberty to take lawful steps to mitigate a tax liability.
The Official Solicitor, who acted as James’ litigation friend, opposed the application. Although he accepted that, in appropriate circumstances, it might be in a person’s best interests to authorise a lifetime gift for the purpose of avoiding or mitigating a tax liability, this would be the case only if it were financially affordable and prudent. A purely tax-driven disposal could be in the best interests of the donor only if the court were satisfied that it would give no risk to his future financial security, even on a cautious appraisal of his future needs.

The Official Solicitor submitted that where, as in James’ case, an award of damages had been calculated to meet a person’s needs for the rest of his life, it could not be said that any part of that award was surplus to that person’s requirements and, hence, it could not be in that person’s best interests to dispose of any part of the damages award (particularly where, as in James’ case, his life expectancy had been revised upwards).

Balance sheet

It was held by Senior Judge Lush:

In determining whether to authorise a lifetime gift, the court must apply the test of best interests. Although the expression ‘best interests’ is not defined in the MCA, section 4 of the Act sets out a checklist of factors that the decision maker must consider when deciding what is in an incapacitated person’s best interests. The senior judge explained how, when carrying out a best-interests analysis in health and welfare cases, the Court of Protection generally applies the so-called ‘balance-sheet approach’ before looking to see if there is any ‘factor of magnetic importance’ that might tip the balance. This terminology of ‘balance sheets’ and ‘factors of magnetic importance’ had been coined by Thorpe LJ in pre-MCA cases, but the approach had survived the implementation of the Act and was, in the senior judge’s view, “widely used today”. By way of illustration, the senior judge referred to the judgment of Munby J in Re M, ITW v Z [2009] EWHC 525 (COP), which was a statutory will application in which the balance-sheet approach had been adopted and in which a factor of magnetic importance had been identified to tip the balance.

Although the balance-sheet approach appeared to work satisfactorily in health and welfare cases, the senior judge admitted to having had one or two reservations as to its utility in all property and affairs cases. Nevertheless, he noted that Morgan J had applied the approach without any apparent difficulty in Re G(TJ) and he proceeded therefore to attempt to apply the approach to James’ case. He did so by drawing up in columnar form a balance sheet showing, in one column, the advantages in making the proposed gift and in the other, the counterbalancing disadvantages. In numerical terms, there were more factors in favour of dismissing the application than allowing it.

The senior judge reminded himself of Thorpe LJ’s observation: “Obviously only if the account is in relatively significant credit will the judge conclude that the application is likely to advance the best interests of the claimant”. He stated, however, that the fact that there are more entries on one side of the balance is not necessarily conclusive (see W v M [2011] EWHC 2443 (COP).

Careful calculation

The senior judge held that, in James’ case, ?and in most cases where an individual’s assets derive exclusively from a damages award for personal injury, a factor of magnetic importance when determining whether or not a lifetime ?gift is in his best interests is likely to be the purpose for which the compensation was awarded and the assumptions upon which it was based. ?This went beyond, in the judge’s view, a consideration of multipliers and multiplicands, but extended to the fundamental principles that underlie clinical negligence litigation generally. In particular, those principles involve placing the claimant in the same position as he would have been had he not suffered the wrong. In simple terms, if the damages calculation had been correct, the last pound of his damages would be spent ?on the last day of his life. There should be nothing left over. If the sum awarded were to run out sooner, then it might be said that the deputy and James’ parents had been extravagant and imprudent, but, conversely, if there were substantial funds left over, then it might be said that they ?had been parsimonious.

The court was generally sympathetic to family members who take on a caring role and dedicate their lives to injured relatives. However, it was not part of the court’s function to anticipate, ring-fence or maximise any potential inheritance for the benefit of those family members, because this is not the purpose for which the award was made (although it might be different if the person in question had surplus funds from a separate source, e.g. from an inheritance or a lottery win). Given the purpose of the damages award, the senior judge concluded that it would not be in James’ best interests to authorise the proposed ?gift at this stage of his life.

The decision of Senior Judge Lush indicates that, in the absence of special circumstances, it is unlikely that the Court of Protection will authorise a gift out of funds derived from an award of damages for personal injury. Indeed, the infrequency of such gifts is illustrated by figures given in the judgment: each year, between 300 and 400 claimants who have been awarded damages for personal injury come within the jurisdiction of the Court of Protection, but, in the judge’s 15 years of personal experience, the number of gift applications of the kind before him in Re JDS did not extend into double figures.

Joseph Goldsmith is a barrister at 5 Stone Buildings