Attorneys: What to do after the house is sold – a practitioner’s guide

 In Probate

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As we get older, and especially if living alone, it may be inevitable that we need to move into a care home.  Once settled in, the question arises as to what will happen with our home.  Although an asset whilst living there, once we have moved out it becomes a drain upon our resources.  Insurance premiums on an unoccupied property are likely to be higher and the various standing charges for utilities will still need to be paid, as will the costs of repair and maintenance (or merely keeping the property safe).

The most sensible option is invariably to sell up and invest the proceeds to help fund the care fees.

Where does an attorney stand on investment matters?

If you have all of your faculties, you can invest the proceeds as you see fit, whether in a deposit account, giving to an investment manager within a discretionary management arrangement or even, perhaps, investing in a reptile breeding farm.

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However, what if your financial affairs are being managed by an attorney, under either a lasting power of attorney for property and affairs (LPA) or an enduring power of attorney (EPA)?

Unless the LPA or EPA specifically provides otherwise, the attorney is required to exercise their powers personally, and in the best interests of the donor (P).  This includes decisions relating to the investment of P’s monies.  It is important to recognise that the power to invest must be exercised objectively according to recognised investment criteria.

As Senior Judge Lush observed in Re Buckley, The Public Guardian v C [2013] COPLR 39: attorneys may incorrectly believe that they can do whatever they like with P’s funds; or that they can do whatever P would have done personally if they had the capacity to manage their own financial affairs (no matter how eccentric such action might be).  He identified that neither option is available to an attorney, “partly because of their fiduciary obligations and partly because (they are) required to act in the donor’s best interests”.  Lush SJ went on to quote Mr Justice Lewison (as he then was) in Re P (Statutory Will) [2009] EWHC 163 (Ch.) – “I cannot see that it would be a proper exercise for (an attorney) consciously to make an unwise decision because P would have done so.  A consciously unwise decision will rarely if ever be made in P’s best interests”.

Whilst an attorney should not invest monies in an unwise manner, or necessarily adopt P’s eccentricities when formulating the investment policy for P’s monies, that is not to say they can ignore P’s principles or wishes.  For example, if P is tee-total, there is no reason why a policy of investing other than in organisations connected with the production, sale or consumption of alcohol may not be adopted.

So, what about the proceeds of the house sale?

Before considering how the proceeds might be invested, it is important to identify P’s needs, both immediate and long-term.  In this context “long-term” will be defined by reference to P’s health and life expectancy.

Short-term requirements

If the house has been sold as P has moved into a care home, the primary concern will be to ensure the costs of, say, 5 years’ worth of accommodation and care fees are set aside.  When identifying how much to set aside, allowance should be made for (i) liquid funds already held by P, (ii) P’s normal income, and any ongoing expenditure, and (iii) if any other financial arrangements will mature and pay out cash at some predetermined time within that period.

If it is intended to apply to the Court of Protection for P to “make” cash gifts, funds should also be set aside to cover the value that is proposed be gifted, together with an allowance for the legal costs of the application.

As we cannot always tell what the future holds, it would probably also make sense to set aside funds for “emergencies” (or are they now called the Unknown Unknowns?).

The best view is that the monies identified in the last 3 paragraphs would best be retained in cash form, preferably on interest bearing accounts with institutions regulated by the Financial Conduct Authority (FCA), which accounts should be in the name of P.  If the amount involved exceeds £85,000 (currently the ceiling for compensation under the FCA compensation scheme), the monies should be shared across a number of financial institutions with no more than, say, £80,000 to be held by any one institution (allowing for interest accrual).

The above broadly reflects the views of Lush SJ in Re Buckley, where he effectively re-wrote the short-term codes for investment on behalf of individuals without capacity, which had previously been included in the Court of Protection publication “Investing for Patients” (published in 1998).  Senior Judge Lush’s views, from paragraph 37 of the Re Buckley judgment, are reproduced in the Appendix to this article.

The availability of cash ISAs should not be ignored.

Long-term issues

To the extent that the proceeds of the house sale are not fully absorbed by the short-term requirements, they might be available for longer term investment.  I say “might”, as, if the cost of taking advice and any transaction costs is disproportionate to the amount involved, or the anticipated returns on investment, it may be most appropriate to retain such funds in the same manner as for short-term investments.

However, if the funds remaining exceed, say, £50,000, or P already has an investment portfolio, a wider range of investment opportunities might be considered.  In this respect, it is important for any advice to be obtained from a suitably regulated adviser – regulated by either the FCA or the Prudential Regulation Authority (PRA).  They could be an independent financial adviser (IFA) or an investment manager.

If P already has a managed investment portfolio, the authority of P or, if they are without capacity, the Court of Protection, will be required to add monies to that account if the investment manager has a “discretionary” mandate – i.e. can buy and sell investments without first consulting P or their attorney.  The same will apply if a new managed investment account is to be opened subject to a “discretionary” mandate.

The attorney will need to carefully consider the investment objectives to be applied to the investment of monies – identifying the primary aim (i) to produce income, (ii) to secure capital growth, or (iii) to try and create a balance between income and capital growth.  Whichever primary objective is decided upon, an adventurous (i.e. high-risk) investment policy would invariably be inappropriate, with most cases being invested in low-risk investments, with medium-risk criteria being applied only to the more substantial portfolios.

The use of investment bonds has been popular, focussing on the ability to withdraw up to 5% of the initial investment “tax-free” every year.  They should be treated with some caution, though, as:

  • Whilst sold as “tax-free” the 5% withdrawal is treated as “basic rate tax paid”, so that higher rate tax payers will have an additional income tax liability;
  • The “tax-free” element disappears as soon as the initial investment has been withdrawn;
  • If the 5% withdrawal is made every year, the initial investment will be withdrawn after 20 years (although this may be of little concern in any individual’s circumstances;
  • If the 5% annual withdrawal is exceeded and, in any event, once the initial investment has been withdrawn, even basic rate taxpayers will have to pay additional income tax; and
  • Even though it may be several layers of investment between them, the bonds are basically invested in the Stock Market, so that if there are any significant drops in the market the bond may be exhausted before the full amount of the initial investment can be withdrawn.

When applying the “best interests” test, many might see it as being in P’s best interests to, say, maximise the value of their estate passing to those intended to benefit under their will, and so invest in the Stock Market.  Whilst a laudable principle, as we see now, and saw in, say, 2008, the historic view that, over time, the Stock Markets can only go up is punctuated by some major “downs”, which can decimate an estate if monies need to be raised (say, to pay increased care costs) during the “down” cycle.  The ability to maintain P must take priority over a perceived view that P would want to maximise the value of their estate for the benefit of the next generation, etc.

Trustee Act 2000

Within his decision in Re Buckley, Lush SJ expressed the view that, when investing on behalf of P, attorneys should act in investment matters as though they are subject to ss. 4 and 5 Trustee Act 2000, which relate to the standard investment criteria and the obtaining  of advice.  It is a shame that neither such requirement, nor the ability of an attorney (or Deputy) to appoint investment managers to manage investment portfolios on behalf of P, were included in the Mental Capacity Act 2005.  Mindful that attorneys are often family members with little investment knowledge, this still seems a remarkable omission.

A timely afterthought?

Whilst various commentators are saying the time is now right to invest in shares, identifying those companies which will survive the current situation is surely a lottery, despite the massive economic support being provided by the government.


Appendix

Investment Code Approximate
Value
Investment requirement Usual investment strategy
       
ST1 £0-£85,000 Available quickly – safe Cash deposit that provides a competitive rate when compared with base rates and NS&I returns
       
ST2 Over £85,000 All or part available quickly – very little risk acceptable Cash deposits with different financial institutions, including NS&I, which stay below the FSCS limits and/or a gilt portfolio to provide returns that compare favourably with base rates
       
ST3 Cash with an
existing
portfolio 
Aim to make all or part available quickly – reducing risk commensurate with P’s requirements Depending on the nature of the portfolio, a liquidation process should be adopted using the annual CGT allowance.  The cash funds should be retained in cash deposits with different financial institutions, including NS&I, which stay within the FSCS limits and/or a gilt portfolio to provide returns that compare favourably with base rates

 

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