IHT & compensation

Posted: 24th April 2012

The Court of Protection recently had to decide whether to grant consent for an inheritance tax (IHT) mitigation plan for a mentally disabled 20-year-old boy.
The boy, referred to as ‘James’ in the court’s judgment, had suffered injuries at birth that resulted in cerebral palsy. A personal injury claim against the NHS Trust concerned was settled with an award of damages that included payment of £2 million to James as a lump sum, £1.6 million of which was regarded as being for his future care needs.
A deputy was appointed by the court to look after James’s financial affairs and the deputy applied to the court for permission to invest £325,000 of James’s assets in a scheme which would reduce the IHT payable on his death. James was assessed by medical experts as having a potential life expectancy of a further 25 years and it was argued that, as his parents were likely to outlive him, an IHT saving scheme would allow them to retain the home in which they lived with their son.

Tax form
The Official Solicitor, acting on James’s behalf, opposed the application. In his view, the scheme was not in James’s best interests as the damages award had been calculated to make provision for his care needs for the rest of his life, and thus it could not be said that any part of the award was surplus to requirements.
The Court, after drawing up a ‘balance sheet’ of the relative advantages and disadvantages of the proposed gift, decided that it was not in James’s best interests to consent to it.

Senior Judge Lush said, ”It is not the function of the Court to anticipate ring-fence or maximise any potential inheritance for the benefit of family members …. because this is not the purpose for which the compensation for personal injury was intended.” He also said that the position may have been different had James’s surplus funds derived from some other source, such as a lottery win.