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October 10, 2013

Inheritance Tax & Joint Bank Accounts

Primary Points of Interest

Where one party provides all of the funds for a joint bank account, it is important to consider how this may affect the inheritance tax treatment on death.

This issue was considered in the recent case of John Matthews (Executor of Mary Matthews deceased) v HMRC (TC02329) where it was found that the full value of the account was subject to inheritance tax despite the funds having been transferred into a joint account nearly 8 years before the deceased's death.

A key issue was the lack of evidence to support the view that the gift was an outright gift of a share of the funds in the account at the date of the gift (ie. that the account was held as tenants in common and not as joint owners).

Whilst the tribunal said that they wouldn't normally expect arrangements within families to be fully documented they would expect the joint account holder to be able to explain the arrangement and how it would work in practice (for example what would happen if one person withdrew funds from the account).

In practice the messages that can be taken from this case are:

1. Difficulties can arise in relation to inheritance tax and joint bank accounts where the funds are provided by one person. Taxpayers in similar situations should consider their position carefully.

2. It is advisable to document all financial arrangements including those within families, or if this is not possible to ensure that the arrangements have been fully agreed and discussed before the gift takes place.

Relevant Background & Case Law

From a legal perspective unless there is an element of gift or a presumption of advancement (ie. certain transfers from husband to wife/parent to child are assumed to be a gift unless there is evidence to the contrary), a transfer into a joint account would normally be deemed to be held on resulting trust for the person who contributed the funds and would therefore be included in their estate on death (Aroso v Coutts).

More commonly however, the transferor will intend for there to be a gift to the other joint owner(s) of the account - the key question is what is the nature of this gift?

Case law such as IRC v O'Neil has established that where there is no immediate gift of the asset (in this case the daughter was unaware of the joint account until after her father's death), the gift takes place on death and will therefore fall into the death estate for inheritance tax purposes.

However, even where the gift takes place immediately, the full value of the joint account may still be subject to inheritance tax unless it can be shown that the account is held as tenants in common with each joint holder having a discrete interest in a specific share of the funds rather than each joint holder having a beneficial interest in the entire bank account.

In the Matthews case the deceased taxpayer transferred funds into a joint account with her son.  Either party could withdraw funds from the account, although in the event no withdrawals were made and the only additions were interest payments which were reported 50:50 on their respective tax returns for income tax purposes.

The executor contended that an immediate gift had been made of half of the value of the account at the date of the gift and that the account was held as tenants in common.  Therefore each party would have been accountable to the other had they withdrawn more than their share of the funds in the account.

It should also be noted that had the funds been owned as tenants in common the deceased's share of the funds would have passed in accordance with her will and not to the other joint account holder by survivorship.

HMRC argued that each party had a general power of appointment to deal with the funds in the account, therefore for inheritance tax purposes the deceased was deemed to have a beneficial ownership of the full balance of the account at death (note - this point was also discussed in Melville v IRC where the Court of Appeal noted that this was an example of double taxation because the same moneys in the account are taxable on the death of each owner).

Alternatively HMRC sought to argue that the gift was subject to a reservation of benefit because the donee did not enjoy ownership and possession of the funds to the exclusion of the donor.

In this case the tribunal found in favour of both of HMRC's arguments and the full value of the bank account was liable to inheritance tax.


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