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When should a deputy make a loan rather than a gift?

At Hodge Jones & Allen we act as professional deputy and trustee for many brain injured children who have been awarded substantial sums of damages. Their parents often make unusual requests for funding. We have to consider whether the request is within our power as deputies and whether it is in our client’s best interests.

The standard deputyship order allows the deputy to make gifts in limited circumstances. Any other gift must be authorised by the Court of Protection.

In the case of Lomas v AK (2014), the parents of a severely brain injured boy (AK) asked AK’s deputy to make a gift of £150,000 to them from deputyship funds so that they could build an adapted house in Pakistan for AK and his family to use.

AK’s parents had already bought land in Pakistan and needed extra funds to build a house which was suitable for wheelchair use and to buy all the disability equipment that AK needed.

They argued that the warmer weather in Pakistan was beneficial for AK’s health. Also, the cost of care was cheaper there. The new house would be designed to meet AK’s needs with hoists, wheelchair accessibility, adapted bathroom and sensory equipment. They planned to live in Pakistan for 6 months each year.

If the property had been located in the UK, the deputy would have checked all the expenses and then drawn up legal documents to show that AK owned a pro rata share in the property reflecting the contribution he had made. This arrangement was not possible in Pakistan and it would have been expensive to translate all the receipts and documents. This is why the deputy wanted to make a gift to AK’s parents of £150,000 instead.

The court was concerned that:

a) AK would lose £150,000 in capital;
b) His parents might not use the money for the building project as planned;
c) His parents might die before him or become incapacitated, requiring additional carers;
d) His parents might divorce or separate;
e) AK’s condition might deteriorate so that he could no longer travel to Pakistan.

The court decided that it would be better for the deputy to make an interest free loan of £150,000 to the parents to be repaid in 10 years. The deputy was then authorised to make a gift of £15,000 per year to the parents to assist with the loan repayments. The end result was that the parents were given the sum of £150,000 to use in the building project, but AK was protected against the risks which the court had identified. If any of those events occurred, the loan could be called in and AK would not have lost the full amount of the capital.

There were additional inheritance tax (IHT) advantages for AK. A gift of £150,000 would have been chargeable to IHT if AK had died within 7 years of the gift. However, the annual gifts of £15,000 would be exempt from inheritance tax as normal expenditure out of income.

This is an interesting solution to a difficult scenario and gives deputies another option to consider when a request is made for a substantial gift of capital.