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Estate planning during your lifetime is sensible. It affords you the opportunity of considering the various strategies which may be employed to mitigate any inheritance tax which may be payable on your death. One strategy clients often wish to consider is simply giving away or “gifting” property (including cash) during their lifetime. Whilst it may sound simple enough, in the absence of proper legal advice, the lifetime gifting strategy can be fraught with pitfalls. Consider this example:
Is it actually a gift?
You may think this is a relatively simple question, with an equally simple answer. Surely it is obvious? In our experience the answer isn’t always obvious and, quite often, Executors find themselves in the unfortunate position, following the death of the “donor”, of having to ascertain whether the payment made was actually a gift, a loan or, instead, perhaps even an ‘advance’ intended to be deducted from the recipient’s entitlement in the deceased’s Will.
The law of Scotland has a legal presumption against donation. Quite simply, this means that the starting point when considering any such payment is that, in the absence of evidence to the contrary, the payment will be viewed as a loan which is due to be repaid to the estate and, in these circumstances, the estate Executors can pursue repayment from the loan recipient.
If the nature of the payment is called into question after the death of the donor, the Court may consider the wider circumstances and relationship between the parties involved. This point was nicely demonstrated in the case of Mailer’s Executrix v Mailer in 2019, a case which demonstrated just how easily a bitter dispute can arise (essentially over a relatively modest sum – here, it was £9,950), amongst parties (siblings) who had previously enjoyed a cordial relationship when there is no written evidence to corroborate the nature of the payment made. The facts in Mailer were straightforward. A payment was made by the deceased into an account held in the name of her son’s partner to assist both of them with a new house build project after the main contractor went into administration. The deceased wished to help them financially but, crucially, there was nothing in writing to verify the nature of the payment. So, the question for the Court was essentially this – was the payment a gift, a loan or, instead, an advance to be deducted from the deceased’s son’s entitlement under her Will?
After considering the particular facts of the case, the Court set out in detail the steps that the deceased ‘could have’ taken to set out the nature of the payment. The presumption against donation was considered but the Court instead accepted that the deceased had made the payment out of ‘natural affection and duty’ having acted out of a sense of ‘natural obligation’. This meant that, in this case, the Court accepted the payment to be an outright gift based upon the facts presented. No repayment to the estate was required, and nor was the payment considered to be an advance of her son’s entitlement under the Will.
The decision in Mailer was ‘fact’ specific and, to avoid such a bitter dispute arising, there can be no substitute for setting out the nature of any such payment clearly, and in writing, with the obligations and expectations of all of the parties duly noted.
If you would like advice on this or any other matter involving estate planning or executry administration please contact the Blackadders Private Client and Executries teams working in Aberdeen, Dundee, Edinburgh, Glasgow, Perth and across Scotland.
Fiona Knox, Solicitor
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