Richard Fullman asks if receivers are ready for the changes introduced by the Mental Capacity Act


Those solicitors specialising in receivership cases will be familiar with the changes in the Mental Capacity Act 2005, and the new procedures should be well planned. However, there may be some professional receivers who look after one or two cases where the changes may be rather more daunting since the Act came into force on 1 October.



Although the principles of the Act are to increase flexibility to the receiver (or deputy, in future), the reality may be different if potential pitfalls have not been considered.



It was the intention of the Act to give more freedom and responsibility to the receiver, so that the current need to obtain a direction from the court on day-to-day matters was removed. In future, a new general order will be issued, giving greater freedom - and in most cases this will be unrestricted. However, if the award or sums involved are greater than £150,000, then a restriction will usually be imposed on annual expenditure.



If any funds over and above this are needed, it is likely that an application will need to be made to the court. The estimated cost per application is expected to be £400. Although the new procedures are not completely clear, the way receivers manage their accounts will have to change to a more disciplined approach to avoid making multiple applications with the associated costs.



The Court of Protection has used information from previous years' expenditure to calculate the future annual income used in the restricted general order. For example, if a receiver has been spending £12,000 a year for the last three years, but had made no provision for a holiday or a new car which is needed in the current year, this will have to be provided for from within the annual sum, or an application will need to be made to the court for funds to be released to cover the additional expenditure. If there were multiple needs in the year, each may attract the additional charge, unless they can be incorporated in one application to cover the multiple events.



We are concerned that this process may also apply to rather more emotive costs such as professional fees and tax, which may also attract the cost of an additional application. These costs may also be difficult to budget for, especially when circumstances can change dramatically year on year. For example, if investments are sold during the tax year and, as a result of good performance, a capital gains tax is bill is incurred, there may be insufficient funds within the annual restriction to cover it.



When advising individuals with a large lifetime award, it is important to understand all the costs involved. However, with the new restricted orders it will be difficult to allow for a step change in annual costs. Assumptions about inflation generally, but more importantly about care costs, which have historically grown much faster than inflation, and been subject to rapid change, will make planning more difficult.



For example, parents may devote almost all of their time to look after their disabled child, and although the physical cost is high, the financial cost can initially be relatively low. However, at some point the parents may have to call on outside help, as the child or the parents get older, and this may result in a substantial increase in the cost of care. Therefore, there may be certain years where the costs 'step up' to a new plateau.



Table 1 demonstrates possible events that will lead to a 'step up' in care costs, for example a change in schooling at ten years old, and then the possibility of moving away from home when the disabled person reaches 19. Table 2 shows the much steeper rise in care costs.



For elderly people who own a valuable house but have limited income for nursing home fees, the calculation might be very different.



Investment professionals, who specialise in helping those with personal injury awards, need to make assumptions about costs at an early stage. When designing the overall portfolio strategy, it needs to be sufficiently adaptable to cater for any change in costs that may occur during the lifetime of the injured party. This must be done in the most tax-efficient way, while retaining flexibility. The need for continual discussion between the client and the investment professional is also important, as an unexpected cost in year five may impact the strategy in year ten.



Sometimes it is tempting to leave a large sum of cash on deposit and feel that this is the most sensible thing to do, but it is not necessarily the lowest-risk approach and almost certainly will not be the most tax efficient for large awards. Any portfolio structure will need to be designed to minimise the effects of inflation, interest rate fluctuations, currency movements and volatility. At any one time, one asset class may be doing better than another, and so it is important to see the

overall picture.



For example, since 1947 after allowing for inflation, cash produced only 1.1%, bonds 0.6%, property 4.5% and UK equities 6.3%. These are annualised real returns (after inflation) with income reinvested. This does not, of course, show the whole picture, as it does not demonstrate volatility (sleepless nights), nor does it show some years where one asset class may significantly outperform others.



A combination of different assets will prove to be the best approach to minimise the impact of a slowdown in any one particular area, and all these asset classes should be viewed as one combined strategy. These may include property (both home and investment), bonds, equities and cash, and the way they are put together may be important for future tax efficiencies.



Since the late 1980s, we have seen a setback for and unprecedented rise in the UK property market, a period of high and low inflation, and a sharp setback for and a sharp rise in stock markets. We have also seen sterling trade between $1 and $2. In summary, it has been a volatile period, so it is important to understand that despite this, making no decision with cash is still making a decision.



Richard Fullman is divisional director at Rensburg Sheppards, one of two panel fund managers appointed to the Court of Protection