Ruling handed down about gifts from a child's compensation award

This recent case handed down by Judge Lush on the 20 March 2014 relates to an application for a gift to be made from the damages award of an 11 year old boy known as AK. AK has cerebral palsy as a result of injuries sustained at the time of his birth.

In 2009 a High Court Judge approved settlement of his claim on the basis that he would receive a lump sum payment of £1,050k plus periodical payments commencing at £140k a year and increasing at various amounts over the following 10 years. The damages were calculated on the basis that it was unlikely that AK would live beyond the age of 15.

AK’s annual income, which included the interest on his investments as well as the periodical payments, was far in excess of his annual expenditure and there was a surplus income of £95,363.71 per year. This was mainly due to the fact that the family were providing the care and were not incurring professional care costs.

The solicitor for AK approached the Court to ask for an Order gifting AK’s parents £150k towards the building of a property in Pakistan suitable for AK’s needs.

The family needed the property to be suitably adapted for AK and to ensure that the rooms were all wheelchair accessible and to provide lifts and hoists so that AK could reach the first floor. The instructing solicitor felt it was more practical to gift the property to the parents as it could be very difficult to obtain the receipts for all the works carried out in Pakistan and to have these receipts and invoices translated into English at further expense.

Furthermore AK benefits from the climate in Pakistan as he had a tendency for respiratory conditions. His health improved whilst in Pakistan as he was more comfortable with the temperature.

The instructing solicitor felt that, due to AK’s limited life expectancy, the gift of the funds to adapt the property would allow AK a better quality of life with his family and she felt that this would be in AK’s best interests.

The official solicitor represented the interests of AK and felt that other options should be considered over and above a gift of the £150k. For instance they felt that perhaps AK may purchase either the land or an interest in the land outright so that he would hold an actual asset. The matter went to Court.

The law relating to gifts 

The deputyship order states that “The Deputy may (without obtaining any further authority from the Court) dispose of money or property of AK by way of gift to any charity to which he may or might have been expected to make gifts and on customary occasions to persons who are related to or connected with him provided that the value of each gift is not unreasonable having regard to all the circumstances and, in particular the size of his Estate”.

Most deputyship orders would have this standard clause in and any gift outside of these parameters would have to be approved by the Court of Protection to show that it has been done in the best interests of the person who lacked capacity.

The Judge, in order to establish whether the proposed gift to AK’s parents was actually in his best interests adopted a “balanced sheet” approach setting out both the advantages and disadvantages of the proposal.

The advantages were as follows:

• AK currently benefits from and travels to Pakistan for several months of the year to stay with his extended family.
• He has respiratory problems and enjoys better health in Pakistan than in Britain, particularly in the winter.
• Care can be provided in a most effective basis in Pakistan.
• At present AK stays in accommodation which is not really suitable for his special needs.
• If AK’s parents are provided with the gift then they will be able to provide AK with accommodation which is specifically adapted to his needs.

The disadvantages are as follows:

• AK will have £150k less in capital.
• Currently there are no architect’s plans and no costings for the construction of the house or its adaptations.
• There is no guarantee that the gift of £150k will actually be used by AK’s parents to build and adapt a property for his use.

The Judge also pointed out that it was important to exercise caution and prudence because no one could predict with any certainty what might happen over the next few years for example:

• AK’s parents could predecease him or become incapable of looking after him which would mean a significant increase in the cost of his care.
• The political circumstances in Pakistan may change and may mean that AK cannot travel there so frequently.
• AK’s own health conditions could deteriorate and he may no longer be capable of making the journey to Pakistan.
• AK may actually outlive his life expectations and may need every penny he can get.

However AK’s life expectancy was only 15 and it was therefore absolutely essential that the work should be carried out without any further delay. The Judge pointed out that this case was very different from an earlier one in which a young man had been awarded damages for clinical negligence and wanted to make a gift in order to reduce the inheritance tax payable on his death. In that particular case the same Judge pointed out that the award was not being used for the purpose for which it was intended and had declined the request for the gift to the young man’s parents. In addition this young many also had a much higher life expectancy.

In this particular case the purpose of the application was to provide a suitable adapted accommodation for AK and this was a proper use of the funds. The Judge therefore decided that it was in AK’s best interests to allow the transaction by way of an interest free loan of £150k to his parents rather than as an outright gift.

The loan was to be repayable over 10 years at a rate of £15k per year and the Judge made a further Order allowing annual gifts of £15k to AK’s parents as there was quite clearly a surplus of income to AK’s requirements. This was to assist the parents in repaying the loan.

This would be an annual gift over and above what is customary but will be permitted if approved by the Court as in this case. This annual gift would be free of inheritance tax as it would fall within the normal expenditure out of income exemption contained within the Inheritance Tax Act 1984. The annual gift was not intended to be an inheritance tax saving but would be due to the fact that it fell within the exemption.

So, when considering whether a gift can be made it is important for the person making the application to look at the purpose of the application and how best this can be achieved. In this case the child will quickly benefit from the loan to his parents and as an aside there would even be an inheritance tax saving as he had surplus income that could be used to pay the annual gift.

Ruth Meyer, Partner in charge of the Court of Protection team at Boyes Turner comments:

“Once again Judge Lush has given a clear and well thought out analysis and solution to what is a difficult decision when dealing with the funds of a person who is incapable of making that decision for themselves. If money is to be given away then make sure that it is clear how this could benefit the person giving the money away. In this case it is clear that the child will benefit from his new home in Pakistan and this wasn’t just a case of a family trying to arrange inheritance tax planning which would only be of benefit to them”.