Your ageing parents have asked to create joint bank accounts with you. This will make their life easier as you’ll be able to draw cash and make other transactions for them. Could this cause tax problems for you and your parents?
Pros and cons
There are many reasons for having joint bank accounts. Setting up such an account isn’t usually difficult but each joint holder should read and understand the small print before agreeing to it. A standard bank agreement treats each joint holder equally entitled to all the funds in the account and, if applicable, liable for any overdrawn amounts. However, tax treatment is different, especially where the joint holders are related.
Tax and joint ownership
There are income tax and inheritance tax (IHT) consequences for joint account holders. For this article we’re looking only at the latter, we’ll consider income tax another time. On the death of one account holder the funds in the account automatically pass to the surviving account holders without the need for it to go through the probate procedure. This can be helpful if access to the money in the account is needed to pay bills etc. until the estate is sorted. The IHT position can be trickier.
Who’s liable for the IHT?
HMRC usually treats the money in a bank account as belonging the person who contributed it. Therefore, even where there’s more than one name on the account, if only one person provides the funds they are treated as belonging to that person for IHT purposes. As you can imagine, if each account holder pays money in and takes it out for their own benefit, establishing who contributed to the balance at any one time can be near impossible.
Tip. Keep a record of who deposits and withdraws money and for what reason. A simple but clear note against each entry on the bank statement will be sufficient. In the event of an account holder’s death, this will help whoever prepares the probate and IHT forms.
Gifts of joint account funds
Where one account holder wants to share the money they have paid in with the other joint holders, special care is needed to ensure that it’s effective for IHT purposes. In two significant cases HMRC successfully argued that despite the intentions of one account holder to gift a share of the money to the others, for IHT purposes it still counted as part of their estate.
HMRC made similar arguments in both instances. Its first was that the account holder who made the gift retained the general power of authority to withdraw and use the money in the account how they wished and therefore had beneficial entitlement under s.5(2) Inheritance Tax Act 1984 . In effect, no gift had actually been made despite the intention. HMRC’s second argument was that even if gifts had been made the giver was able to use the funds at will and so “reserved a benefit” in them. Such gifts remain part of the giver’s estate for IHT purposes.
Tip. To prevent problems with HMRC it’s a good idea for joint account holders to draw up their own agreement about who has entitlement to the funds in it.
Generally, HMRC attributes the money in a bank account as belonging to the person who contributed it. This can be difficult to establish. Therefore, keep a record, e.g. a note on the bank statement, of who makes each deposit and withdrawal and for what reason. Also record any gifts of money in the account from one account holder to the other.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.