Re AK (Gift Application)

Summary: This case considered whether a substantial gift (£150,000) should be made from the damages award of an eleven-year-old boy to his parents.

Senior Judge Lush began by noting that, although the MCA 2005 applies only to persons aged 16 and over (section 2(5)), the effect of section 18(3) is to enable the Court of Protection to appoint a deputy who can take a long term view where a child has been awarded substantial compensation for personal injury or clinical negligence and it is unlikely that the child will have the capacity to manage the award when they attain adulthood.

AK was born in October 2002 and due to a prolonged period of hypoxia at the time of birth he has cerebral palsy. Acting by his mother as litigation friend, he sued the local NHS Trust for clinical negligence. In 2009 a High Court judge approved a substantial settlement which included a lump sum payment of £1,050,000 plus a series of index linked periodical payments which were calculated on the basis that it was unlikely that AK would live beyond the age of 15. The assessment of life expectancy was made in 2006 by a consultant paediatric neurologist who strongly recommended that a further assessment was made in 4 or 5 years' time. At the date of the hearing such an assessment had not been carried out which Senior Judge Lush described as regrettable.

AK's estate was worth £1,311,156 and he had a surplus income of £95,363.71 a year due to the fact that his mother provided his care gratuitously or at a much lower cost than was envisaged when his claim was settled. His care costs were therefore subject to possible change in the future.

Julia Lomas of Irwin Mitchell Solicitors was appointed as AK's deputy for property and affairs in 2009. Senior Judge Lush commented that she had considerable experience of managing the estates of people with cerebral palsy and acquired brain injury. In November 2013 she applied to the court for an order "gifting AK's parents £150,000 towards the building of a property in Pakistan suitably adapted to AK's complex needs". In a witness statement that accompanied the application Ms Lomas set out the following facts:

• AK and his family are Pakistani. Most of their family live in Pakistan and they recently visited for 4 months;
• AK's mother and father have purchased land with the intention of building a family home near their extended family;
• They have requested £150,000 as a contribution to the property being built so it is suitably adapted;
• A gift is the more practical approach given the difficulty of obtaining receipts for all works to be carried out in Pakistan. Further, receipts would have to be translated which would cause additional expense;
• There were health benefits to AK from being in Pakistan, associated with the climate;
• There would be long term financial benefits for AK as it was anticipated that the family would spend 6 months of the year in Pakistan which meant that expenditure on agency care would decrease dramatically as there were more family members in Pakistan to help with care and even professional care was far cheaper than in the UK;
• AK would inherit the property if his parents should die;
• AK's life expectancy 'does not greatly exceed 20' and the property would allow him to experience a better quality of life.

Given that the application sought a substantial lifetime gift, Senior Judge Lush joined AK as a party and invited the Official Solicitor to act as his litigation friend.

The Official Solicitor took the view that the deputy had not properly considered all the ways in which AK might contribute to the purchase or adaptation of a home for himself and his family in Pakistan by way of an investment rather than simply as a gift to his parents. The suggestion made was that AK might be able to purchase either the relevant land or interest in that land which would mean that he was left with a valuable asset. The OS acknowledged that if that was not possible or reasonably practicable then a gift should be authorised but only on the basis that the deputy was satisfied that it was to be used within a certain period for the construction of an adapted home for AK.

Senior Judge Lush noted that where P is profoundly disabled and has lacked capacity from birth the application of the best interests' checklist in s.4 MCA 2005 is not always conclusive because of its strong emphasis on supported decision making and substituted judgment. Given the limitations of the s. 4 checklist, Senior Judge Lush applied a 'balance-sheet' approach, setting out the advantages and disadvantages of the proposal. The advantages were essentially those set out above in the witness statement of Ms Lomas. The disadvantages were those highlighted by counsel for AK instructed by the Official Solicitor, namely that he would have £150,000 less in capital, there were no architect's plans and no costings for the construction of the house or its adaptations and no guarantee that the £150,000 would actually be used by AK's parents to build and adapt a property for his use.

Senior Judge Lush also held that it was important to exercise "caution and prudence" when applying AK's funds because of a series of uncertainties: (i) care costs increasing significantly if his parents predeceased him or became incapable of looking after him; (ii) his parents separating or divorcing in which case a second property may have to be purchased and adapted; (iii) political circumstances in Pakistan deterring the family from travelling there; (iv) AK's condition deteriorating so that he could not travel; (v) AK's condition deteriorating so that he required a more intensive and expensive care regime; (vi) AK's life expectancy exceeding the original prediction so that he needed 'every penny he can get'.

However, Senior Judge Lush acknowledged that if his life expectancy were only 15, as originally predicted, then time was of the essence and it was essential that the works be carried out without further delay (AK was 11.5 years old at the time of the hearing).

Senior Judge Lush noted that the purpose of the application was to provide suitably adapted accommodation for AK's use and enjoyment (a proper use of his funds) and not to reduce the amount of inheritance tax payable which was not a purpose for which the award was intended (see Re JDS: KGS v JDS [2012] EWHC 302 COP).

Senior Judge Lush held that it was in AK's best interests to allow the transaction to proceed by way of an interest free loan of £150,000 to his parents rather than as an outright gift. A loan was preferable to a gift because (i) AK retained the capital as part of his estate and (ii) it was more likely to ensure that his parents complied with the purpose for which the loan is intended.

The details of the loan were that it was repayable over 10 years at a rate of £15,000 a year. The judge further authorised the deputy to make annual gifts of £15,000 to AK's parents, if there is sufficient income surplus to his requirements in each accounting period, to assist them in repaying this loan.

Whilst not material to his decision, Senior Judge Lush noted that the annual gifts of £15,000 would fall within the normal expenditure out of income exemption contained in section 21 of the Inheritance Tax Act 1984.

Comment: With apologies for apparent (or actual) judicial toadying, Senior Judge Lush's solution in this case strikes us (with one partial exception) as neat and approaching ingenious. He mitigated the disadvantages he set out in his judgment by the making of a loan rather than a gift whilst also making a gift in all but name as long as AK has sufficient surplus funds (this loan/gift could be christened a ''lift'). The solution is therefore elegantly straightforward but takes account of the following complexities: (i) concern that the parents will actually use the money for the intended purpose (a loan gives the incentive to fulfil the purpose); (ii) uncertainties about AK's life expectancy – a pragmatic solution if life expectancy is short (let's get on with it so AK can get some enjoyment from it) and also if his life expectancy is greater than predicted (the £15,000 annual gifts are only made if there are sufficient surplus funds); uncertainties about care costs in the future (again, the £15,000 annual gifts are dependent on sufficient surplus funds).

The judgment also exposes (not for the first time) the deficiencies of the s.4 MCA 2005 checklist when P is profoundly disabled and has lacked capacity since birth. The judge's careful application of a 'balance sheet' approach is a useful tool in such cases.

The one caveat that we would enter is that it does not appear that thought was given by either the Official Solicitor or to the court as to the fact that the payment out from AK's funds was being authorised out in respect of the purchase and modification of property outside England and Wales. What – if any – jurisdiction the Court of Protection would have over the way that those monies were actually spent in Pakistan is an interesting question that – we rather hope – does not fall for further consideration in this case in due course.