Why a capacity assessment is important when making a lifetime gift

A lifetime gift may include property, a large sum of money, jewellery or any other valuable asset. Making a gift during one’s lifetime is a means of reducing the inheritance tax burden on beneficiaries. It is useful when the value of an estate is near or above the nil - rate band (which is currently £325,000). If a person lives for at least 7 years after making the gift, the gift is fully exempt from inheritance tax. If they die within 7 years of making the gift, it may be subject to inheritance tax as it is brought back into the estate. However, the tax charged is tapered depending upon how many years have passed between making the gift and the death of the donor. More information can be found here.

Evidence of mental capacity around the time of making a gift is wise as it reduces the possibility of a successful legal challenge in the future. A capacity assessment is essential in anyone whose capacity for the decision to make the gift is under question. It is also highly recommended that older individuals in whom there is no cognitive impairment also have a capacity assessment. Robust evidence of mental capacity is particularly pertinent to those with large estates who have a few potential beneficiaries. Allegations of undue influence on the donor by the beneficiary of a gift, or that the donor lacked mental capacity when making the gift are often cited by those bringing about legal challenges to the conferring of a lifetime gift.