Mark McLaughlin looks at the inheritance tax treatment of joint bank accounts.
Joint bank and building society accounts (e.g., between spouses or civil partners, or family members) can be tricky for inheritance tax (IHT) purposes when one of the joint account holders dies. The main difficulty is in establishing how much of the balance in the account ‘belonged’ to the deceased immediately before death; was it 50%, 100%, or something else?
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).
How does it work?
A person's estate for IHT purposes generally comprises the property to which they are beneficially entitled. A person with a general power to dispose of property (other than ‘settled’ property) is treated as beneficially entitled to it.
When it comes to joint money accounts, HMRC’s guidance (at IHTM15042) states: ‘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].’
For example, if a bank account was jointly held between an elderly parent and adult daughter, and the parent provided all the funds 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 to the daughter, so all the funds form part of the parent’s estate (e.g., see Sillars and another v IRC [2004] SpC 401).
Alternatively, HMRC might contend (among other things) that the IHT ‘gifts with reservation’ anti-avoidance rules apply 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.
Making a withdrawal
In the above example, if the parent retained the right to withdraw all the funds, there should generally be no lifetime gift when the money is paid into the account. However, if any part is subsequently withdrawn for the daughter’s benefit, there may be a gift by the parent at that time.
Even if the parent initially provided all the funds but successfully made a lifetime gift of (say) 50% to their daughter, the IHT treatment of later withdrawals needs to be considered. In the absence of evidence to the contrary, it is likely that any money withdrawn by each person will be set as far as possible against their own share of funds.
Pass it on…
On death, money in a joint account generally passes automatically to the survivor under the right of survivorship principle, in the absence of satisfactory evidence that the joint ownership was severed (e.g., see O’Neill and others v IRC [1998] SpC 154).
However, if the other account holder is the deceased’s spouse or civil partner, this will not normally result in an IHT liability, due to the spouse or civil partner exemption.
Practical tip
To avoid potential problems, it may be prudent to avoid the unnecessary use of joint accounts. However, if a joint account is preferred or unavoidable, full records and documentation should be kept (e.g., application forms, withdrawal mandates, passbooks, terms and conditions of account), in case of any subsequent enquiry by HMRC. Professional advice is highly recommended.
