What is a Property and Affairs Lasting Power of Attorney, and how do you use it?

Posted on By Joanna Pegum
Older person counting coins in her palm

A Lasting Power of Attorney (LPA) is a legal document that allows you to appoint trusted individuals, who are known as attorneys, to make decisions on your behalf if you lose mental capacity.

The advice below focuses on the Property and Financial Affairs LPA. You can establish a separate LPA for Health and Welfare.

What can your attorneys do for you?

The LPA allows your attorneys to make a range of decisions in relation to your finances, including:

  • Paying bills,
  • Managing bank accounts,
  • Making investment decisions, and
  • Selling or renting property.

Who can you appoint?

You can appoint anyone that you trust to manage your affairs for you. The attorneys do not need any special qualifications, though they must be over 18, and not bankrupt or subject to a debt-relief order. If you are appointing more than one attorney, you can decide whether they are appointed jointly (all decisions to be made together) or jointly and severally (each attorney can act independently of the others).

When can your attorneys act?

Once signed, your LPA must be registered with the Office of the Public Guardian before the attorneys can act.

The attorneys can usually act immediately once the LPA has been registered, even if you still have mental capacity. This can be useful if you are travelling or physically incapacitated, for example if you are in hospital. It is also possible to specify that your attorneys can only act after you have lost capacity.

How should the attorneys make their decisions?

Your attorneys must always act in your best interests, and involve you in the decision-making process as far as possible. If you have lost mental capacity, they should consider your past wishes, feelings and beliefs before making their decisions.

Your attorneys should assume that you are able to make decisions for yourself unless it is clear that you do not have mental capacity. Even if you are losing capacity, your attorneys should help you to make your own decisions as far as possible. They should not conclude that you lack mental capacity simply because you wish to make a decision that they consider unwise.

The attorneys must consider taking advice where appropriate, especially in relation to investment decisions.

You can include instructions and preferences within the LPA as to how your attorneys should manage your affairs. It is sensible to have conversations with your attorneys while you have capacity so that they are aware of your wishes.

Are they difficult to set up?

The process includes completing the LPA forms and going through the signing process. You will need to meet someone known as a Certificate Provider who will check that you understand the power you are giving away, that you have capacity on the day of signing, and that you are not under any undue pressure.

The Certificate Provider can be your solicitor, GP or someone who has known you for two years or more. Once completed and signed, you then need to register the LPA with the Office of the Public Guardian. There is a registration fee to pay (currently £82 per document).

LPAs are an important part of planning for the future and should be considered as early as possible.

What about other parts of the UK?

This article applies to English and Welsh LPAs. Different rules apply in Scotland and Northern Ireland. 

Stephen Horscroft TEP is a Partner in the Private Client Advisory Group at Cripps, Tunbridge Wells, England 

What is an Enduring Power of Attorney (EPA) and how is it used?

Posted on By Joanna Pegum
Older man and woman sit by paperwork with a calculator

It is good practice for people to set up a legal safeguard so that, if they lose mental capacity in future, a trusted person can look after their affairs.

In England and Wales the Lasting Power of Attorney (LPA) was introduced in 2007, replacing the older Enduring Power of Attorney (EPA), however EPAs that were signed before 1 October 2007 can still be used.

If you have been appointed as an attorney under an EPA, you will be responsible for helping the person, known as the donor, to make decisions in relation to their:

  • Money and bills,
  • Bank and building society accounts,
  • Property and investments, and
  • Pensions and benefits.

Acting as an attorney is a significant responsibility, and it is important to understand your duties and be familiar with the principles to apply when making decisions.

When can you act?

You can act for the donor straightaway using an unregistered EPA, provided that they still have mental capacity. If the donor has lost, or is losing, capacity to make financial decisions, you must register the EPA with the Office of the Public Guardian before you can continue to act.

While the donor has mental capacity you should act at their direction and with their consent.

The banks, building societies and organisations where the donor holds funds will require a certified copy of the EPA, and identification from you, before they will allow you to deal with an account.

How do you know if the donor lacks capacity?

This is a difficult question because capacity can vary from day to day. The law states that the donor lacks capacity if they are unable to make a decision due to an impairment with the functioning of their mind which means that they cannot understand, retain or weigh the necessary information.

The ability to make decisions is both time and issue specific. The donor may have capacity to make a simple decision about paying a bill but not a complex investment decision.

You should not consider the donor to have lost capacity just because you disagree with a decision they have made.

What principles should you follow?

You should assume that the donor is capable of making a decision unless shown otherwise and you should take all practical steps to help the donor make the decision themselves. All decisions must be made in the donor’s best interests and in a way that least restricts their rights and freedoms.

You should take account of any past wishes and feelings of which you are aware. Make sure you keep records of how you reached your decisions, in case you are challenged in the future.

How should you make investment decisions?

You will need to obtain and follow proper advice, ideally from a qualified financial advisor. One of your duties is to review the suitability and diversity of their investments. It is essential that you keep the donor’s assets separate from your own.

What else should you bear in mind?

Unless you are a professional attorney, you will not be paid but you can recover reasonable expenses incurred when carrying out your duties.

Take advice before making gifts or loans from the donor’s assets, or selling assets below their true value.

Finally, you will need to keep accounts of the donor’s assets, income and spending. The Office of the Public Guardian and the Court of Protection can ask to check these at any time.

What about other parts of the UK?

This article applies to English and Welsh EPAs. Different rules apply in Scotland and Northern Ireland. 

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Stephen Horscroft TEP is a Partner in the Private Client Advisory Group at Cripps, Tunbridge Wells, England

Things to consider when making a will

Posted on By admin
child beneficiary

It’s very easy to put off making a will. No-one likes to think about their own mortality, and it can be tricky working out who should inherit what, whether it’s property, money or possessions.

Let’s break it down into stages to make it more manageable.

Who gets what in your will?

Who would you like to benefit from your will? You could make a list of people that you would like to inherit from you such as your spouse or partner, children, other family members, friends and charities. The people that benefit from your will are called beneficiaries.

How much do you own?

Have a think about what you own, including money in bank or building society accounts, property, pensions, life assurance and possibly a business. Try to estimate the value of these assets. You may also have cars, furniture or jewellery that have significant or sentimental value, which you may like to leave to someone in particular. You should also consider your digital assets. You can make all this clear in your will.

What about specific gifts in your will?

You could start thinking about specific items or amounts of money to leave to your beneficiaries, such as ‘my wedding ring to my daughter’ or ‘£1,000 to my son’. These are called specific gifts. You can leave the remainder, known as ‘the residue’, to your other beneficiaries. Because you won’t know how much you will have left, divide it into shares. For example ‘I leave the family home to my wife, and the residue of my estate is to be divided in equal shares between my children’.

Will you have to pay inheritance tax?

The inheritance tax allowance is currently £325,000 for an individual, or £650,000 for a couple who are either married or in a civil partnership. If you live with your partner but are not legally civil partners, then he or she will not qualify from this allowance after you die.

Anything over this threshold will usually be charged at 40% for inheritance tax. You can leave everything to your spouse or civil partner free of inheritance tax.

The Residence Nil Rate Band gives you an additional allowance of £175,000 (frozen until 5 April 2026) to be used against your home, provided you leave it to your children or grandchildren. This allowance can be transferred to a spouse or civil partner if it isn’t used up on the first death. It’s best to take professional advice, if you are unsure, because it is a complicated matter and there could be other reliefs or allowances available to you.

There is an unlimited relief for a spouse/civil partner if both are UK domiciled (or transferor non-domiciled).

If it is a gift from a UK domiciled to a non-UK domiciled spouse/civil partner (the non-UK domiciled spouse/civil partner can elect to be treated as UK domiciled for IHT purposes) then it is £325,000.

Do you have any vulnerable family members?

If you have young children, you can appoint a legal guardian in your will to ensure that if something were happen to you and your partner, they will be looked after by someone you trust implicitly with their well-being.

If you have a family member with disabilities, or mental health issues, who you need to provide for after your death, you should speak to a professional about setting up a trust. This can be managed by someone that you trust after you have gone, and you can leave specific instructions or wishes about how they should manage it. (For further information, read ‘How can I make sure my disabled child is provided for when I die?’)

Who can help me make a will?

As specialists in inheritance and succession planning, members of STEP, who are known as TEPs, draft wills and trusts, administer estates, act as trustees and advise families on how best to preserve their assets for future generations.

Choosing a professional to help you to deal with such important and often sensitive issues can be difficult. Many aspects of planning are non-regulated, meaning anyone can write a will, for example, regardless of training or expertise. With a TEP, you’re in safe hands.

Can I really use a trust to avoid inheritance tax?

Posted on By admin
Mature couple talking to financial planner at home

Trusts are occasionally seen as devices to avoid paying tax. In reality, you would never set up a trust just to gain tax advantages.

When you set up a trust you are giving up ownership of the assets it holds. This is a dramatic move, and will normally only make sense if you have clear objectives about what you want to achieve with your assets. Tax should really be a secondary issue.

In most cases any tax advantages or exemptions given to trusts are tightly targeted at those that are seen as doing social good – such as charitable trusts, trusts for disabled or vulnerable people, etc.

In many cases the trust may avoid one type of tax, but will be caught by another.

A lot of people think that if you put your money in a trust it will be exempt from inheritance tax. However, trusts are subject to three separate inheritance taxes: an entry charge; an exit charge; and a ten-year charge.

Let’s look at these in detail.

Entry charge for a trust

The entry charge is paid when you transfer assets into a trust. These may include buildings, land or money and can be either:

  • a gift made during a person’s lifetime, or
  • a transfer that reduces the value of the person’s estate (for example an asset is sold to trustees at less than its market value). The loss to the person’s estate is considered a gift or transfer.

Exit charge for a trust

The exit charge is similar, but it takes place when a trustee pays out of the trust to another person, called a beneficiary. The charge is based on a percentage of the value of the assets being transferred. Where payments of income are distributed to beneficiaries, no inheritance tax is payable because the beneficiaries will be liable for income tax instead.

Ten-year charge

The ten-year charge, also known as the periodic charge, is payable where the trust contains relevant property, where the value is over the £325,000 inheritance tax threshold known as the nil-rate band. It is charged on the ‘net value’ of relevant property in the trust on the day before each ten-year anniversary. The net value is the value after deducting any debts and reliefs, such as Business Property Relief or Agricultural Property Relief. However, neither of these are applied if the assets have been held for less than two years. If all of the assets are transferred to one or more of the beneficiaries before the ten-year anniversary, no charge will occur, but, of course, an exit charge will apply.

Charges

Both exit charges and ten-year charges are incurred at 6%, but there are many complicating factors and exemptions regarding ‘excluded property’, which get quite technical.

These charges are time consuming and complex to calculate, and trustees generally need to consult a professional advisor to arrive at the correct figure. This can be expensive, but it is worthwhile, as delayed or incorrect payments to HMRC will result in interest charges and/or financial penalties.

Speak to an advisor

As you can see, the rules around inheritance tax and trusts are very complicated, and each person’s individual circumstances will dictate their tax position. If you are considering setting up a trust you should speak to an advisor to discuss your specific situation and find a solution that works for you.