Inheritance Tax Pitfall – Whose Money Is It?

 

If a bank or building society account is jointly held by family members (e.g. father and adult daughter) it can cause some difficulties for inheritance tax (IHT) purposes. 

 

For example, when one of the joint account holders (say, father) dies, how much of the funds in the bank or building society account should be treated as having been held by him for IHT purposes on death? For some, the instinctive reaction would be to treat him as being the beneficial owner of 50% of the funds in the account. However, as in many tax matters, the answer is ‘it depends’. 

 

In most cases, on death, the parent’s beneficial share in the account will normally pass by survivorship to the adult child, and will therefore be liable to IHT. An issue may also arise as to whether (and to what extent) the provision of funds by one account holder, and the subsequent withdrawal of monies by the other, constituted a lifetime gift. 

 

This article considers the IHT treatment of joint accounts in England, Wales, and Northern Ireland. In Scotland, the position may differ (see the HM Revenue and Customs (HMRC) Inheritance Tax manual at IHTM15051 and IHTM15054). 

 

HMRC could challenge the ownership of funds in a joint account in a number of ways, particularly upon a joint account holder’s death. For example:

 

1. As a general rule, a person's estate for IHT purposes comprises the property to which he or she is beneficially entitled. A person with a general power to dispose of property (other than ‘settled’ property) is treated as   beneficially entitled to it. A ‘general power’ for these purposes means ‘a power or authority enabling the person by whom it is exercisable to appoint or dispose of the property as he thinks fit’ (IHTA 1984, s 5(2)).

 

Thus, if one of the joint account holders (e.g. the parent in the above example) has provided all the funds in a joint account, but has access to all the funds in that account, in the absence of evidence to the contrary HMRC might argue that no lifetime gift was made and that the fund forms part of the parent’s estate (see, for example, O’Neill and others v IRC [1998] Sp C 154 and Sillars and another v IRC [2004] Sp C 401). 

 

HMRC guidance states (at IHTM15042): ‘You should normally regard each account holder as beneficially entitled to the proportion of the account which is attributable to their contributions. So - if the deceased provided the whole of the money, the whole of the account at death should be included in the [IHT account on death].’

 

2. Alternatively, HMRC might accept that the parent made a lifetime gift in the above circumstances (particularly if withdrawals are made by the daughter from those funds). Furthermore, HMRC could seek to charge IHT on the entire funds contributed by the parent under the ‘gifts with reservation’ anti-avoidance provisions (FA 1986, s 102) if ‘possession and enjoyment’ of those funds has not been assumed by the daughter, or on the basis that the funds have not been enjoyed to the exclusion (of virtually the entire exclusion) of the parent. 

 

It can sometimes be difficult to identify how much money was introduced into a joint account by each of the parties. Keeping a record of funds introduced by each account holder can be important when trying to establish the assets in a joint account holder’s estate. 

 

For example, in Lidher v Revenue and Customs [2017] UKFTT 153 (TC), the appellant (BSL) was the sole executor of the estate of his father (BL). BSL submitted an IHT account to HMRC showing details of an estate, which included 50% per cent of money held in a bank account. However, BSL subsequently contended that BL had no beneficial interest in the bank account upon his death. It was submitted (among other things) that BSL had provided all the capital in the account, and that BL was a pensioner who would have been unable to provide the funds contained in that account. However, based on the facts and evidence the First-tier Tribunal concluded that 50% of the account was correctly included in BL’s estate. 

 

It may be better to steer clear of joint money accounts, to prevent any uncertainty and difficulties as outlined above. However, if a joint account is preferred or cannot be avoided, it would be prudent to keep full records and documentation. HMRC’s guidance (at IHTM15042) states: ‘When establishing the share based on the deceased’s contributions you should note that the true legal position is far from clear so it is important to establish the facts and obtain any relevant documents, such as application forms, withdrawal mandates, passbooks, terms and conditions of account before considering the legal and equitable rules.’