HMRC enquiries and the importance of record keeping

The demand arose in the context of gifts having been made by a mother to her children, who were appointed as her attorneys under a Lasting Power of Attorney (“LPA”) to manage her property and financial affairs. The case highlights the importance of having clear evidence in relation to gifts made in later life, to reduce the risk of an investigation by HMRC post-death.

It is essential, for the protection of the person making the LPA (“the donor”), that attorneys are not able simply to use the donor’s funds to make substantial gifts, either to themselves, or others, without prior authority from the Court. Attorneys who make unauthorised gifts risk those gifts being declared void and being ordered to return those funds to the donor’s estate. That said, this only becomes relevant once the donor loses capacity to manage his/her financial affairs. Prior to that time, the donor is fully able to authorise gifts being made, regardless of whether these are to named attorneys under an LPA or other individuals.

Prior to our involvement, HMRC attempted to claim that gifts made by the mother to her children should be declared invalid, as they were made after the LPA had been registered. This was despite the fact that: (a) HMRC had no evidence that the mother lacked capacity at the time the gifts were made; and (b) the gifts were made to the only two beneficiaries of the estate (so there was nothing inherently suspicious about the gifts). HMRC argued that, as the gifts were made after the LPA was registered, they were entitled to treat the gifted funds as still forming part of the mother’s estate for inheritance tax purposes and a significantly increased demand for inheritance tax was made as a result.

HMRC ultimately dropped the point, but only after our clients had incurred fees to instruct us to engage in correspondence with HMRC to address the issue. As part of this, a great deal of time was spent collating and providing relevant evidence to HMRC to support a position that the mother was both happy to make the gifts and had the mental capacity to do so. Whilst it was positive that HMRC ultimately decided not to pursue the point, the clients had no recourse to recover the increased legal costs from HMRC.

This case serves as a warning to those who have made LPAs and intend to make gifts to the appointed attorneys at some future point. It is likely that the increased demand by HMRC resulted from guidance passed down to case handlers and, as a result, our view is that this will not be the last time an investigation of this nature will be made into gifts made during the latter stages of the life of a now deceased person.

As such, if it is likely that the donor’s estate will be taxable and the intended gifts may be large in value, it seems important that, with a view to limiting the time required to address such issues with HMRC, the donor keeps clear records of the gifts made. In particular, if those gifts are made later in life, perhaps at a time when the donor’s capacity is beginning to diminish, it would be advisable for the donor to seek legal advice. This is perhaps with a view to obtaining a letter or note from a solicitor (to be kept with the donor’s records) confirming that he/she understands the nature of the gift proposed and that the solicitor is comfortable that the client has the necessary capacity to make that gift. Had such evidence been available in this case, investigations made by HRMC would have been resolved far more quickly and cost effectively.