Joint bank accounts and IHT: The tricky bits
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Malcolm Finney examines the potentially difficult issue of how to treat joint bank accounts for inheritance tax purposes.
It may be a surprise to those not involved with taxation matters that jointly held property of whatever kind can create all sorts of problems which, for general tax purposes, have not all been resolved satisfactorily.
Perhaps the two most common forms of jointly held property are real estate and bank accounts. This article looks only at jointly held bank accounts.
The term ‘jointly held’ property refers to the legal title of the property concerned. It may be that the property concerned is held by more than two persons, but often only two owners are involved. Thus, for example, Mr and Mrs Smith may open a bank account in their joint names at ABC Bank; the bank account and any statements will show each of their names. Similarly, it is not uncommon as a sole surviving parent gets older for their son’s or daughter’s name to be added to their parent’s account, thus turning their parent’s account into a jointly held account. Co-habitees may also decide that they will operate a joint bank account rather than two separate accounts.
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Commonest form of jointly held bank account
Perhaps the most common form of joint bank account is one where either account holder may withdraw funds (without the permission or signature of the other holder); either account holder may add funds to the account; and neither holder keeps a record of their individual withdrawals or additions.
Inheritance tax (IHT) arises in principle on death or on the making of lifetime gifts.
What’s the position on death?
On the death of one of the joint holders, the whole of the monies in the joint account fall within that person’s estate for IHT purposes, not just (say) 50%. The consequence is that double taxation arises as IHT is chargeable on the death of each joint holder on the whole of the monies in the account. Nevertheless, this is the strict legal position.
This strict position is ameliorated as HMRC operate a concession under which an attempt is made to identify the proportion of monies contributed by each holder, and it is that proportion which is included in the relevant death estate. Where each holder contributes to the account (both parties are working) and each makes not dissimilar amounts of withdrawals, it is in practice not uncommon to include 50% in each holder’s estate on death.
It should however be noted that where the joint holders are married (which excludes co-habitees), on death, typically the surviving spouse inherits the account by survivorship and thus the inter-spouse exemption applies to the deceased spouse’s monies transferred to the surviving spouse - no IHT normally arises.
For IHT purposes, lifetime transfers from the joint account may occur when one of the holders withdraws funds from the account. HMRC state that where X adds money to a joint account held in the names of X and Y and Y withdraws monies for their own purposes, X is treated as having made a lifetime transfer at the time Y effects the withdrawal. However, should X withdraw the monies, no lifetime transfer of value for IHT occurs.
Any lifetime transfer by X to Y qualifies as a potentially exempt transfer, unless X and Y are married, in which case the transfer is normally exempt.
Surviving spouse and adult child joint account
A surviving spouse may hold an account in their sole name. For an adult child to operate the account on behalf of their parent to help the latter administratively, the parent may agree to add the child’s name to the account.
However, in such a situation, it is generally not the intention of the parent (or child) that the child becomes entitled to any of the monies.
Accordingly, a simple declaration of trust might be executed under which it is made clear that parent and child hold the monies in the account on trust for the parent alone. The bank account may show names as parent and child (as nominee). The declaration may add that on the spouse’s death, the monies in the account are to pass by survivorship to the child or, for example, to be shared between the child and their siblings in equal amounts.
For married couples, joint bank accounts are not particularly problematic due to the spouse exemption applicable for IHT. However, for others, for example co-habitees or friends, it would generally be advisable not to maintain significant monies in a joint account.