[I am not an accountant, although I help a small business with their accounts, hence my use of Accounting Web. This question is about my own Inheritance Tax planning - I hope it's in order.]
I am acquainted with the rules on Regular Gifts from Income being exempt from IHT if there is documentary proof of intent and a breakdown of past income and expenditure as per IHT403. I just want to clarify how gifts made jointly by a couple who jointly share income and outgoings should be deemed to be apportioned when one of them dies.
To take a fictitious example.... John earns £36,000 (net) and his wife Mary earns £12,000 (net), total £48,000. They pool their income. Regular annual expenditure of £40,000 to maintain their lifestyle is made from their joint account. So they have an £8,000 annual surplus between them, £4,000 of which they pay into a Child ISA for their grandson. They consider this £4,000 to be a "joint gift from us both" and it is made as a single payment from the joint account.
Note that the annual expenditure of £40,000 is not affordable by either spouse alone. Nor does Mary's own income cover 50% of the annual expenditure.
Mary dies, and her executor has to fill out an IHT403, which requires you to show, for the relevant years, the Deceased's annual Expenditure / Income / Gifts (not the combined household Expenditure / Income / Gifts).
There are two ways to present the figures in this fictitious couple's case:
1) 50/50 apportionment: John & Mary pool their income, so John effectively transfers some of his income to Mary such that they have an effective income of £24,000 each, regular expenditure of £20,000 each, and an annual surplus of £4,000 each. They make an annual Gift for Income of £2,000 each to the grandson's Child ISA.
- This is "the way we see it" for many couples, and simplifies record-keeping, but it would presumably be misleading to show Mary's Income as £24,000 on an IHT403, so I don't see how this approach can be taken.
2) Apportionment based on Income percentages: Mary contributes 25% towards their joint pooled income, so logically contributes 25% towards their joint annual expenditure and towards the joint annual gift to the grandson. Thus the IHT403 figures for Mary would be Income £12,000 (the actual figure), Expenditure £10,000 (25%), Annual Gift £1,000 (25%).
- This approach seems to be defensible, but may be over-simplified in the real world. Many couples both contribute to truly 'joint' expenditure via a joint account but separately, with individual accounts, pay for their own clothes, club memberships, commuting costs, etc, so it's not quite as simple as a 50/50 Expenditure split.
Other couples maintain individual bank accounts and agree to pay specific bills (husband pays mortgage and utilities, wife pays groceries and car, etc.) which invites a 3rd approach:
3) Apportionment based on actual contributions to specific lines of Expenditure. This would require very detailed record-keeping and a very confusing IHT403 statement if represented in a literal way.
I can't find any official guidance on this 'apportionment' point. HMRC do at least say that they are not interested in which account regular Gifts From Income are drawn from - it doesn't have to be a 'current account' as long as the Executor can show that there was surplus income to cover it. So it seems they will not get down to the level of "which bank account was used for what".
Any advice welcomed. My wife and I want to start making regular Gifts From Income, and we want to be sure to keep Income and Expenditure records at the right level of detail.
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You start with "I am acquainted with the rules on Regular Gifts from Income being exempt from IHT if there is documentary proof of intent and a breakdown of past income and expenditure as per IHT403" ... but, despite HMRC occasional claims about the importance of the regularity, in my experience that factor is irrelevant.
The core concept, as I'm sure you know, is based simply on being able to show that the gifts (for which exemption is being claimed) can be shown to have been made out of the deceased’s income rather than out of capital.
In my experience this is a straight forward accounts exercise ... in which the greatest difficulty is tracking down all the new-fangled channels through which expenditure has occurred. Oh for the days of a few sets of bank statements & cheque-book stubs (plus some credit card statements) ... before people started having overseas accounts (for spending money whilst on holiday) or cards like Revolut (akin to virtual banking) and many others.
However once you've tracked down all the expenditure items (and noted those that are gifts to a 3rd-party), it's easy to see whether these sums exceed (or not) the total net income from all sources (obviously excluding non-income items arising from sales of assets etc).
So far so (relatively) simple ... and as far as I can see the rest of your post concerns only how to allocate the expenditure and the gifts between two individual people who have been operating jointly.
When dealing with my parents' estates (specifically after the first death) I took an extremely pragmatic view as follows:
* their income was pooled (not in taxpayer terms but in operational terms via joint bank accounts);
* so it was literally impossible to determine separate expenditures (it was entirely random as to which of them signed a cheque or whatever) - and these had to be treated as pooled as well.
* therefore, so long as any gifts (which likewise might have been initiated by either of them) could be shown to have not required capital disposal ... those gifts were exempt (without any need to allocate proportions of each gift to one or other parent).
I may have been lucky (in that I ended up with a charming HMRC bloke in Belfast signing-off my spreadsheets as acceptable), but I never encountered the problem that you foresee in your OP - and therefore side-stepped your perceived problem.
I guess if push comes to shove then your 'option 1' is the closest to what I've described - but I don't recall the issue of apportionment arising when completing the various IHT forms ... and the spreadsheets that I supplied certainly don't show any.
Conclusion?
I don't think there's quite the issue that you think exists ... but others more qualified may well disagree.
Oh and keep really good annual records of expenditure (by type rather than by person - and indicating where an item is a gift) plus equally good records of income (from whatever sources). You may not be around to receive the plaudits but your executors will thank you!
Thank you for your detailed response. Maybe I am worrying unnecessarily about apportioning expenditure to the deceased. Thanks to downloading statements into a software package I already have very good detailed records of expenditure by type and compiling a joint/household statement of Income and Expenditure is straightforward, and would readily prove that, between the two of us as a couple, the gifts were made from surplus income. Your own experience indicates that this may suffice.
I believe the law on joint accounts differs in different parts of the UK. Tax follows law.
There is though a common principle that what you're taxed on is based on what you put in less what you take out. The alternative, a charge based on what you could take out (which would in many cases be all of it), would be patently unfair.
With that starting point, the 50:50 approach doesn't really fit. But what really helps is that John and Mary are keeping a record of what they are doing. They're telling us... or, rather, their executors... how much of each 'joint' gift was made by each of them. What better evidence could there be of what they intended? It's just what their executors needed.
I follow what you're saying, but does that mean you feel option 2 is a better fit?
If so, I can see the logic (in terms of completing a return) even though in reality there's nothing to back it up ... e.g. J & M gifting £4k (with payment from a joint account) could be 'split' any way they choose to report it.
I guess that's why you're laying the emphasis (better than I did) on the essential nature of good records *including* who is deemed to have gifted how much?
BTW I'm curious as to what you're referencing when you say "the law on joint accounts differs .."?
I recently took the decision to make all my bank accounts joint with my two sons (3 joint names but any one signatory) ... and yes, foolhardy or not, I trust them.
On the plus side (and my intention behind this) it means that if I'm incapacitated for a while then they can sort out bills for me - and if I drop dead those accounts remain unfrozen (indeed the banks simply delete my name from the accounts)!
I had indeed assumed that only my income is to be paid in and that (less provably) only my expenditures (gifts or otherwise) would be paid out - but are you saying there's some other legal aspect of which I should be aware? This is England btw.
The full value of all of the joint accounts is still in your IHT estate. Any 'gifts' from those accounts are transfers of value by you. IHT works on individual estates (BO) and transfers of value from those estates, remember: the word 'gift' is largely an alien concept to IHT legislation (it's used in s102 etc but that's about it afaik - it's certainly not used in... wherever the exemption in the OP is).
In England, the accounts pass by survivorship, as you say. The cash won't pass to your executors (qua executors) so won't be available to your executors (qua executors) to pay any IHT.
I hope the brothers trust each other.
I should add that it is possible to transfer BO from one joint account holder to another - say if you said "boys this one is for you to enjoy now". This is a further complication, underscoring the value (to the executors) of the deceased having maintained good records.
Thank you - for both responses.
Yes, I believe they trust each other - but if in the future they don't, then on their own heads ...
And yes, that's another example of the need to keep good records (particularly with regard to intentions at the time of the transaction - especially as the banks themselves often don't keep full records anymore).
You can see why some people end up throwing their hands up in frustration and giving everything away to charities (the only truly tax-free route)!
Grateful for the replies. I was interested in the husband/wife Joint Account aspect but Hugo Fair has a Parent/Children joint account and TaxDragon warns about deemed Beneficial Ownership thereof. There is a useful blog on BO here https://www.lesteraldridge.com/blog/tax-trusts-wills-probate/joint-bank-...
which warns (as TaxDragon says) that the whole of the balance of a Joint Account normally passes to the survivor(s) and none of the balance forms part of the Deceased's estate unless there is some documentary trail to show some differing intention - a useful reminder for IHT planning.
However, in my OP I was more concerned with how a 'joint gift' by husband/wife would be deemed to be apportioned between them, and how each individual's portion would be assessed to be affordable (or not) from that individual's surplus income when the first of them dies.
In my John and Mary example (which roughly mirrors my wife's and my position, only the figures are different) it is transparent that as a couple they have plenty of surplus income to cover their joint annual Gifts from Income, but not transparent as to how much each one of them has surplus each year, and thus how much each one of them has contributed to the joint gift.
I think John & Mary may be safer documenting any Gift From Income as being from one of them or the other, rather than a 'joint gift'. They will still have to account for the apportionment of Income and Expenditure to prove that the giver had sufficient surplus income to cover the gift, but at least they won't have to apportion the Gifts themselves.
none of the balance forms part of the Deceased's estate...
That's the legal estate, obviously. Still part of the IHT estate. Be aware of what you are reading.
The answer to your question depends on the beneficial ownership of the account. HMRC's default position is to treat BO as following contribution. In Hugo's case, he has made 100% of the contribution, so HMRC will treat him as the 100% BO. If Hugo makes a withdrawal, nothing changes. But Hugo will be treated as making a ToV should one of his sons make a withdrawal other than for Hugo's benefit. HMRC may therefore be very keen to examine any withdrawals.
With H&W, HMRC don't really care about transfers - lifetime or death. It's just too hard to work anything out, and there's no tax at stake till second death.
In John and Mary's case, with the annual gifts covered by annual exemptions anyway, it makes no odds at all. In any real case, including yours, if the numbers are significant, it would be worth taking professional advice. It's not enough to know there's an exemption, you need to understand IHT better than you appear to. No offence.
No offence taken. I over-simplified the John & Mary example, and as you point out the gifts in my fictitious example were within the annual £3,000 capital transfer exemptions anyway. In the real world case of my wife and myself we would plan to make gifts from income after using up the £3,ooo capital transfer exemptions. We have made a number of capital transfers over the years, some within the annual £3k limit, some as PETs in excess of the limit, all scrupulously documented for our executors.
As you say, given that spouses can transfer between each other tax-free in life (and by testament) we can arrange matters how we like whilst both are alive, as long as it's recorded for the executors. However your comment that "HMRC's default position is to treat BO [in a joint account] as following contribution" is most helpful and I shall document Income & Expenditure (including gifts) on that basis.
Although we're getting off the original track, I'm not at all sure that I agree with the statement in the Lester Aldridge blog. [I should say that, several years ago, I used Richard Fairbairn from there for assistance on one estate ... and everything was fine].
But when TD says "The full value of all of the joint accounts is still in your IHT estate", that is how I've always understood things to operate.
Just to be clear my logic in using joint accounts was not for any form of planning to reduce/avoid IHT - simply that it removes that unfair burden on the executor when the estate has bills to pay (during administration) and has the money to pay them, but can't because bank accounts are frozen. Ownership is not the same as accessibility and does not transfer automatically with the death of the BO.
However, in your case (of a husband/wife Joint Account) that may well be broadly irrelevant of course - other than during the calculation of any Tax and the priority order of some of the calcs within that process.
EDIT: appear to have crossed posts with TD who, as usual, has explained better than me exactly what I've just tried to say!
Ownership is not the same as accessibility and does not transfer automatically with the death of the BO.
That may be true on occasion in Scotland. I thought it otherwise in EWNI.
But IANAL. In any jurisdiction!
It was a bit of a throwaway remark of mine ... but one of us is not sharing the same understanding that I thought we had in common here - and it may well be me?
What I meant was that a single Bank account (which is operated as a joint account although I am the BO) would, upon my death, remain accessible to the other joint account signatory (in terms of the bank accepting instructions for transactions) - but the ownership of the contents of the account would not simply transfer to that other person (even if it ends up there via distribution of the estate). Correct?
Otherwise there's a gaping hole in IHT (I sell my house / place all the proceeds in the bank / ensure my beneficiaries are made joint signatories to the bank account / and drop dead at my leisure safe in the knowledge that all those monies are no longer part of my estate for IHT purposes). Surely not?
Re your "correct?" - read that legal link Strug gling provided, and the case therein. Your contention is effectively, I think, that the money is yours (and yours alone). That's probably correct as we speak but the case shows how little it might take to turn you and your sons from bare trustees for you to joint tenants of the money. Assets held under English joint tenancy do not pass under the Will but by survivorship.
Legal types tend to use the word "estate" to mean something like "the assets subject to the Will". (It's about competency of disposition.) Joint accounts may therefore be outwith the legal estate.
There's an entirely different definition of "estate" (based on beneficial ownership) in IHTA. Hence surely not a gaping hole, correct.
Thanks once again ... and drat these blasted blinkers I must be wearing!
It hadn't occurred to me (naivety alert) that there was an alternative meaning of Estate to consider - what you call the one used by legal types - hence my confusion as all my 'logic' was following on from the IHTA definition (BO etc).
I should of course have thought of your example regarding 'Assets held under English joint tenancy' - as per property jointly owned not as tenants in common.
As you say, no IHT between husband and wife anyway so including joint account value in deceased's estate is immaterial where joint account holder is a spouse. But your position with your sons needs care, as TaxDragon helpfully points out.