LPA Gifting Limits and HMRC's Avoidance Threshold
- Adil Akhtar
- 35 minutes ago
- 19 min read
LPA Gifting Limits and HMRC's Avoidance Threshold
One of the most practically misunderstood areas of estate and tax planning involves what an attorney under a Lasting Power of Attorney can and cannot do with the donor's money when it comes to making gifts. Families acting in good faith , trying to continue a pattern of giving established by an elderly parent, or attempting to reduce a likely inheritance tax bill before the donor's death , frequently step outside the boundaries of the law without realising it. The consequences range from having to repay gifts personally to being removed as attorney.
The conflict between IHT planning instincts and the Mental Capacity Act framework is real, often misunderstood, and the subject of a growing number of Office of the Public Guardian investigations.
What the Law Actually Permits: Section 12 of the Mental Capacity Act 2005
Section 12(2) of the Mental Capacity Act 2005 sets out the circumstances in which an attorney under an LPA can make gifts from the donor's estate. The permission is narrow: gifts may be made on customary occasions to people related or connected to the donor, or to charities the donor supported or might have supported. Customary occasions include births, birthdays, weddings, civil partnerships, anniversaries, and recognised religious celebrations such as Christmas, Eid, Diwali, and Hanukkah.
Two conditions apply to every such gift. First, the gift must be reasonable in value, having regard to the circumstances of the case and in particular the size of the donor's estate. Second, the person making the LPA can only restrict the powers of the attorney, not expand them , so even if the LPA itself appears to authorise larger gifts, the section 12 limits cannot be exceeded by the terms of the document alone. GOV.UK
What section 12 does not permit is anything beyond these boundaries , and the list of things that fall outside attorney authority without Court of Protection approval is longer than most families expect.
Any types of gift outside the customary occasion framework, including gifts for tax planning purposes, require consent from the Court of Protection. Gifts of high value, such as property, will almost certainly be outside an attorney's powers even if the donor expressed their wishes regarding those assets when they had capacity.
What Counts as a Gift Under the Act
A gift is defined broadly as any transfer of ownership of money, property, or possessions to another person without payment. This includes using the donor's money to purchase something for another person, transferring money or belongings to an individual, providing someone with an interest-free loan from the donor's funds (where the lost interest is itself a gift), and writing off an existing loan
Notably, a maintenance payment is not considered a gift under the Act. Using the donor's funds to benefit someone else is not a gift where there is an obligation to maintain that person , for example, continuing to pay for a dependent adult child's care costs where there was an existing legal or moral obligation.
The "Reasonable Value" Question: No Precise Figure Exists
This is the point that creates the most practical difficulty. Attorneys frequently ask , reasonably enough , how much they can give. The answer provided by the OPG is unsatisfying but legally honest.
The Mental Capacity Act 2005 does not define a "reasonable" or "unreasonable" gift. The OPG cannot give precise figures or guidance. Attorneys are expected to decide how much is reasonable, taking into account the circumstances of each case.
The OPG does not give precise guidance on what constitutes a reasonable amount. Instead, attorneys are expected to consider the impact of the gift on the donor's financial situation , looking at current and future income, assets, capital, savings, and future needs.
The factors an attorney should weigh include whether the donor was in the habit of making gifts before losing capacity, whether the proposed gift mirrors what the donor would have given had they retained capacity, the size of the donor's estate relative to the gift amount, the donor's current and anticipated care costs, and the relationship between the donor and the recipient.
Section 12 cannot be used to make gifts above what the donor would have made when they had capacity. If the donor was not in the habit of making gifts prior to losing capacity, the attorney may not have authority to begin making gifts at all.
The practical test is therefore backward-looking as much as it is forward-looking. What did this person do when they could decide for themselves? Gifts that mirror an established pattern are defensible. Gifts that represent a departure , particularly where they are larger, more frequent, or directed at different recipients than the donor's prior practice , carry significantly higher risk of challenge.
The Annual Exemption and IHT Planning: A Misconception to Address
The most common misunderstanding in this area is the belief that the IHT annual gift exemption of £3,000 automatically authorises an attorney to make annual gifts of that amount. It does not.
The IHT annual exemption is a tax concept. It describes what will fall outside an estate for IHT purposes if a gift is made. It says nothing whatsoever about whether an attorney has legal authority to make that gift. The scope for making IHT gifts under the Mental Capacity Act is relatively limited. The IHT form specifically asks whether anyone acted under an LPA during the deceased's lifetime, and records gifts and transactions made in the seven years prior to death.
An attorney who makes annual gifts of £3,000 to each of the donor's three adult children , on the basis that the IHT annual exemption permits it , may be acting well outside their authority if there is no established pattern of that gifting, if the donor's estate is modest, or if the donor's care costs are significant. The gift may be IHT-efficient if later questioned by HMRC; it may simultaneously constitute a breach of the attorney's duty under the Act.
The Best Interests Test and IHT Planning
Where a donor with substantial assets and a history of estate planning loses capacity, the position is more nuanced. IHT considerations may genuinely form part of a best interests analysis in the right circumstances.
In the COP case PBC v JMA, the Court ruled that inheritance tax mitigation was not an independent factor in deciding whether proposed gifts of around £7 million from the estate of an individual who lacked mental capacity were in her best interests. Instead, the COP created a balance sheet of factors weighing for and against the gifts. After reviewing that balance sheet and noting the donor's pattern of giving and the importance she had placed on IHT planning prior to losing capacity, the COP authorised the gift.
This is a significant but carefully constrained precedent. IHT planning alone does not justify a large gift. The donor's established attitude towards estate planning, combined with their clear prior intention to reduce the IHT burden on their estate, was what tipped the balance. A donor who had never expressed any interest in IHT planning and had made only modest customary gifts would present a very different balance sheet.
The Court of Protection has power to authorise more substantial gifts if satisfied this would be in the donor's best interests. For example, if an older person has substantial assets then tax planning might be a reason for making gifts. The word "might" in that formulation is important. It is one factor among many, not a standalone justification.
Advice to clients who consider estate planning important is to include wording in the preference section of an LPA for property and financial affairs which provides that the attorneys may apply to the Court of Protection for authority to make gifts that would not be permitted under the general rules, for the purposes of inheritance tax planning or any other purpose if the attorneys think it is in the individual's best interests.
This anticipatory drafting , done while the donor has capacity and can express their wishes clearly , is one of the most practical steps available to anyone who wants their estate planning instincts to survive loss of capacity. It does not override the need for Court of Protection authority in significant cases, but it provides material evidence of the donor's prior wishes, which carries considerable weight in any best interests assessment.
HMRC's Position on LPA Gifts
When a donor dies, the estate's inheritance tax return , form IHT400 , requires disclosure of gifts made in the seven years before death, and specifically asks whether any person was acting under a power of attorney during that period. HMRC's interest in LPA gifting is therefore direct and systematic.
The IHT form records gifts and transactions made in the seven years prior to death. Gifts made by an attorney that exceeded the attorney's authority under the Mental Capacity Act may not be treated as valid gifts for IHT purposes by HMRC, since they were made without legal authority.
This creates a double jeopardy risk that is rarely articulated clearly. An attorney who makes unauthorised gifts , perhaps claiming the benefit of the IHT annual exemption or the normal expenditure out of income exemption , may face two separate consequences:
The civil law consequence: The OPG can investigate, the Court of Protection can order repayment of the unauthorised gifts, and the attorney can be removed. In serious cases, criminal proceedings for financial abuse are possible.
The tax consequence: If the gift was not validly made under the attorney's authority, HMRC may take the position that it does not constitute a valid inter vivos transfer , meaning it may not reduce the estate for IHT purposes in the way the attorney intended. The asset effectively remains part of the estate.
The combination means that an unauthorised gift may produce the worst of both outcomes: legal liability for repayment with no corresponding IHT reduction.
Gifts Made on Customary Occasions and the HMRC Position
For gifts clearly within the section 12 limits , modest birthday and Christmas gifts proportionate to the donor's estate , HMRC's approach is generally uncontroversial. These fall within the normal expenditure out of income exemption or the annual gift exemption depending on their nature, and absent any broader challenge, they are treated as valid disposals.
The risk area is larger, patterned gifting , for example, annual gifts to each of five grandchildren using the IHT annual exemption, made consistently over several years while the donor lacked capacity. If those gifts were not authorised under section 12 (perhaps because the donor had no established pattern of such giving before losing capacity), HMRC may include the gifts in the estate when calculating IHT , while the OPG simultaneously investigates whether the attorney acted within their powers. Getting advice before starting a programme of regular gifting under an LPA is not optional if the amounts are meaningful.
The Re: Various Lasting Powers of Attorney Case
The 2019 Court of Protection decision Re: Various Lasting Powers of Attorney [2019] EWCOP 40 remains the most practically significant judicial guidance on the boundaries of attorney gift-making, and it is worth understanding what it actually established.
In Re: Various Lasting Powers of Attorney [2019] EWCOP 40, Judge Hilder considered circumstances where eleven LPAs included instructions that appeared to exceed the statutory authority set out in section 12(2) of the Mental Capacity Act.
Most concerned providing financial support to adults. The Court set out a decision tree for attorneys to follow when considering whether to use donor funds to benefit someone else.
The key principle from the case is that a donor of an LPA cannot include an instruction in the document that authorises a gift that would not be allowed under section 12. In other words, however clearly the LPA document purports to authorise a particular gift, if that gift falls outside section 12, the instruction is invalid. The document cannot expand what the law permits.
An attorney may use the donor's funds to benefit someone else where the attorney is under a degree of obligation to do so , either under general law such as spousal maintenance obligations, or because the donor has expressed a preference that the attorney reasonably considers to reflect the donor's best interests at the time.
The decision tree from the judgment essentially asks: is there an obligation to make the payment? Is there a preference expressed by the donor? Is making the payment consistent with best interests taking all circumstances into account? Positive answers can support the payment. But where the driving motivation is tax planning for the benefit of beneficiaries , rather than the donor's own best interests , the Court has been consistent that this is insufficient on its own.
What Attorneys Should Do in Practice
The gap between what families want to do and what the law actually permits creates genuine practical difficulty. Several concrete steps reduce both the legal and tax risk.
Before incapacity occurs: The LPA document should be drafted with a preference clause that explicitly addresses the donor's wishes regarding estate planning and gifting. This does not authorise gifts beyond section 12, but it creates evidence of the donor's wishes that will carry weight in any subsequent best interests assessment or Court of Protection application. Including wording that the attorneys may apply to the Court of Protection for authority to make gifts for IHT planning purposes provides a clear mandate for attorneys to take that step when needed.
When the donor loses capacity: Attorneys should document the donor's prior gifting pattern , amounts, frequency, recipients, and the occasions on which gifts were made. This evidential record supports any contention that subsequent gifts mirror established practice and fall within section 12.
For significant gifting programmes: If an attorney wishes to make a gift that goes beyond section 12 limits, they must apply to the Court of Protection for approval. The application process involves filing a COP1 form and supporting evidence with the Court, which will assess whether the proposed gifts are in the donor's best interests. This is not a quick or cheap process , typical timescales run to several months and professional legal costs can be significant , but it is the only safe route for substantial or non-customary gifts.
Documenting decisions: There is no single approach to gifts. Attorneys and deputies must make each decision considering its own context and timing. A contemporaneous record of the decision , why this gift, to this recipient, of this amount, at this time , provides the audit trail that the OPG may request if a complaint is made.
The Office of the Public Guardian views unauthorised gifting as financial abuse. It will, in extreme cases, seek to revoke the LPA or deputyship order. If a deputy or attorney makes an unlawful gift, they may have to personally repay that gift even if the money has already been spent by the recipient, and could face criminal prosecution.
When HMRC and the OPG Intersect
The IHT400 enquiry process and OPG investigations can operate simultaneously and independently. An estate where substantial gifts were made under an LPA in the years before death may face HMRC questioning on the IHT returns at the same time as beneficiaries or professional advisers raise OPG concerns.
The practical sequence HMRC follows is to check the IHT400 disclosure of attorney-managed periods, then cross-reference the gifts listed against the donor's income and asset history to assess whether the gifts could have qualified under the IHT exemptions. Where gifts appear large relative to income, were made in a short period, or bear the hallmarks of a deliberate IHT reduction programme rather than ordinary giving, HMRC may open a formal enquiry.
If the OPG separately determines that gifts were unauthorised and orders their repayment, the IHT position adjusts , gifts repaid to the estate are back in the estate and the IHT is recalculated accordingly. In cases where repayment occurs after the IHT return has been filed, an amended return is required.
Key Takeaways
● Section 12 of the Mental Capacity Act 2005 limits attorneys to making gifts on customary occasions to people related or connected to the donor, or to charities. Gifts must be of reasonable value relative to the donor's estate. There is no precise monetary threshold.
● The IHT annual exemption of £3,000 is not a legal authority to make gifts under an LPA. These are separate frameworks. Using the IHT exemption as justification for an attorney-made gift without section 12 authority conflates two entirely different rules.
● Tax planning gifts , including those designed to reduce the eventual IHT bill , require Court of Protection authority. They cannot be made by attorneys acting within their standard LPA powers, even if the donor had expressed a wish to make such gifts.
● Donors who want their estate planning wishes to survive loss of capacity should include a preference clause in the LPA expressly authorising attorneys to apply to the Court of Protection for gift-making authority for IHT planning purposes.
● The IHT400 return specifically asks whether the deceased was subject to an LPA during their lifetime, and lists gifts made in the seven years before death. Unauthorised gifts may be challenged by HMRC as not constituting valid transfers, potentially leaving them in the estate for IHT calculation.
● Unauthorised gifting is treated by the OPG as financial abuse. The personal consequences for attorneys include obligation to repay, removal, and in serious cases criminal prosecution. The intention to benefit the donor's family is not a defence..
FAQs
Q1: Can an attorney under an LPA make use of the normal expenditure out of income IHT exemption on behalf of the donor, or is this also restricted by section 12?
A1: Well, it is worth noting that this is one of the most important and least discussed distinctions in this entire area. The normal expenditure out of income exemption , which allows habitual gifts from surplus income to leave an estate free of IHT without any seven-year clock , is potentially available for gifts made under an LPA, but subject to the same section 12 constraints as any other gift. The exemption itself is an HMRC tax concept that determines whether a gift is IHT-exempt if it was validly made. If the gift was not validly made under the attorney's authority, the exemption cannot rescue it from either the legal or tax consequences.
For the exemption to be properly used by an attorney, the gifts must: reflect a habitual pattern established by the donor before they lost capacity, be funded from genuine surplus income rather than capital, not reduce the donor's standard of living, and be proportionate to the donor's estate and care cost commitments. In practice, an attorney continuing a pattern of monthly payments to grandchildren from a donor's pension income , where that pattern was established years before incapacity , has a reasonable argument both that the gifts fall within section 12 (they mirror prior practice) and that the normal expenditure exemption applies. Starting a new programme of income-based gifting after incapacity begins, with no prior pattern, is considerably more precarious on both counts.
Q2: If an attorney makes a gift that turns out to be unauthorised, can the recipient keep the money or must it be repaid to the donor's estate?
A2: In my experience, this is the question that creates the most family tension when an OPG investigation concludes that gifts were made without authority. The legal position is that an unauthorised gift made by an attorney , one that exceeded the authority granted by section 12 or by a Court of Protection order , can be treated as void. The OPG has power to refer the matter to the Court of Protection, which can order the repayment of those gifts. Critically, the obligation to repay falls on the attorney, not necessarily on the recipient. If the recipient has already spent the money, the attorney is personally liable to make good the shortfall from their own funds.
This is a genuinely alarming consequence for attorneys acting in good faith who genuinely believed they were entitled to make the gifts. The recipient may also be required to repay if they received the money knowing it was given without proper authority. For families where gifts have already been made and a challenge is now emerging, taking specialist legal advice as quickly as possible is essential , the prospects of reaching a pragmatic resolution with the OPG are typically much better if engaged early than if the matter is allowed to escalate to formal Court of Protection proceedings.
Q3: Does the section 12 gifting limit apply differently to an Enduring Power of Attorney compared to an LPA?
A3: Well, it is worth noting that EPAs , enduring powers of attorney created before the LPA regime replaced them in October 2007 , remain valid if they were properly executed, and many are still actively in use. The gifting authority under an EPA is broadly similar to that under an LPA, but slightly more restricted in one specific respect. Under an EPA, attorneys can only make gifts on seasonal occasions or on the anniversary of a birth or marriage. Under an LPA, the list of customary occasions is somewhat wider , including other religious and cultural celebrations. The "reasonable value" test and the requirement that gifts be to people connected to the donor or to charities they might have supported apply to both.
One important practical difference relates to instructions and preferences in the document: EPAs use different terminology , conditions instead of preferences, restrictions instead of instructions , but the underlying principle that the document cannot expand the statutory gift-making authority is the same for both. If an EPA attorney is unsure whether a proposed gift falls within their authority, the Court of Protection application route is identical. Attorneys acting under older EPAs sometimes assume the rules are more relaxed because the EPA was created at a time when people were less aware of the restrictions. They are not , the limitations have applied since the Enduring Powers of Attorney Act 1985, and HMRC's IHT400 enquiries into gifts made under EPAs are treated in exactly the same way as those made under LPAs.
Q4: Can an attorney make a gift to themselves from the donor's estate for services rendered, such as for caring for the donor?
A4: Well, this is one of the most significant legal minefields in the entire LPA framework, and the OPG takes a particularly stern view of it. The general rule is that attorneys cannot benefit themselves from the donor's estate , they are in a fiduciary position, and self-dealing is subject to the most careful scrutiny. Making a gift to yourself from the donor's assets, even where the motivation is to compensate for caring time, is generally not permitted under section 12 without specific authorisation from the Court of Protection. A family member acting as attorney who also spends considerable time providing personal care to the donor might assume , reasonably, in human terms , that some financial recognition is appropriate.
The law does not easily accommodate this intuition. If the LPA itself contains an instruction or preference regarding payment to the attorney for care services, that provision may be valid if carefully drafted , but cannot override the section 12 restrictions on gifts. The alternative route is for the Court of Protection to authorise a payment from the donor's estate to a caring attorney as a specific order, based on evidence of the care provided and its value. Attempting to achieve the same outcome informally through "gifts" risks being characterised as financial abuse even where the attorney's intentions were entirely honourable. Keeping detailed records of time spent caring and seeking specific authority from the Court is the only safe approach.
Q5: How does HMRC treat gifts made by an attorney during a period when the donor still had capacity to make decisions themselves?
A5: In my experience, this is an area of genuine evidential complexity that affects many estates. An LPA can be active and registered while the donor still retains capacity , the LPA can be used from the moment it is registered, not only once capacity is lost. Where gifts are made by the attorney during a period when the donor had capacity, the key question is whether those gifts genuinely reflected the donor's own wishes and decision-making, or whether the attorney was acting independently without the donor's input. If the donor had capacity and was directing the attorney's actions, the gifts are essentially the donor's own gifts and HMRC treats them as such , subject to the normal IHT seven-year and exemption rules.
If the attorney was acting without the donor's specific involvement and direction during a period of retained capacity, the position is less clear. HMRC's IHT400 will ask about the LPA and the period of its use, and the executors will need to be able to explain whether each significant gift was made at the donor's direction or by the attorney acting on their own judgement. The safest practice , even where the donor retains capacity , is for the donor to make gifts themselves rather than through the attorney, preserving a clear factual record that the donor was the decision-maker.
Q6: What is the position if an LPA includes a specific clause allowing the attorney to make annual IHT exemption gifts of £3,000, and can the Court of Protection enforce that clause?
A6: Well, the 2019 judgment in Re: Various Lasting Powers of Attorney directly addressed this type of provision. The position is clear and somewhat surprising to many people who drafted their LPAs with professional help before that judgment: an LPA cannot validly include an instruction that purports to authorise a gift that would fall outside section 12 of the Mental Capacity Act. Even where a solicitor included a well-intentioned clause authorising annual IHT gifts, that clause has no legal effect if the gifts it purports to authorise would not be permitted under section 12. The Court of Protection may sever such provisions from the LPA, or may refuse to allow the LPA to be registered at all if the conflicting provision is sufficiently problematic.
In practice, many LPAs drafted before 2019 contain such clauses. Attorneys acting under those documents who have been making annual £3,000 gifts on the authority of the clause are in a legally uncertain position. The annual gift may be defensible on other grounds , if it mirrors prior practice and is proportionate to the estate , but the clause itself is not the authority for it. Anyone acting under an LPA with a gift-authorising clause that was drafted before the 2019 judgment should take specific legal advice about whether their gifting programme remains on solid ground.
Q7: Does it matter for HMRC purposes whether gifts made under an LPA were authorised by the Court of Protection or made without authorisation, as long as they were reported on the IHT400?
A7: In my experience, the distinction between Court-authorised and unauthorised gifts matters significantly to HMRC, even where both are disclosed on the IHT400. A gift authorised by the Court of Protection was made with full legal sanction , it was considered to be in the donor's best interests and was approved by the appropriate body. Such a gift is a valid transfer for both legal and IHT purposes, and if it was made using an IHT-exempt route (annual exemption, normal expenditure out of income, or potentially exempt transfer with the seven-year clock running), HMRC treats it accordingly in the estate calculation. An unauthorised gift , one disclosed on the IHT400 but made without Court authority , is a different matter.
HMRC may treat such a gift as not constituting a valid lifetime transfer, effectively leaving the asset in the estate for IHT purposes. The disclosure itself satisfies the reporting obligation, but it does not prevent HMRC from challenging the validity of the transfer or treating it as part of the estate. This means the IHT cost of unauthorised gifts may be the worst of all worlds: the attorney faces personal liability for repayment to the estate, and the estate itself may still include the value of the gift in its IHT calculation. Transparency on the IHT400 is legally required and practically sensible, but it is not a substitute for authorisation.
About the Author:
Adil Akhtar, ACMA, CGMA, FCMA, (membership ID is 990250923) serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than eighteen years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, (registered with Companies House), combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
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