‘Can I avoid inheritance tax by setting up a joint account with my daughter?'

Telegraph

2 days ago

Email Mike: [e-mail].
Dear Mike,
Recently, I was told that a joint account, for example, between an elderly parent and their child, would not be liable for inheritance tax.
The bank would transfer the account to the survivor's name on presentation of the death certificate. In addition, this joint account could be set up at any time prior to death, and not be subject to the seven-year rule.
Is this true?
Kind regards,
– James
Dear James,
Your question is more complicated than it may seem, and I am aware that there are some differing views on this. I will give you my view, which is consistent with the HMRC manuals. In doing so, I recognise that these manuals are not the law, just guidance. Ultimately it is for the courts to determine the law.
I will also assume that you live in England, Wales or Northern Ireland, so my apologies to readers in Scotland where I know different rules can apply.
One point that often causes confusion is that, in the absence of any evidence to the contrary, on death the assets in a joint bank account pass automatically to the survivor. The bank account does not therefore appear in the death estate for probate purposes.
However, that does not mean that it escapes IHT. Whether it does so will depend on the facts, and these can become convoluted. The key point to keep in mind is that for inheritance tax purposes it is the beneficial ownership that counts.
The problem can be in determining how the beneficial ownership of the money in an account is split, and this is typically not equally. The starting point is to consider who contributed to the account.
This is explained in IHTM15042 as follows: '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 IHT400.'
For readers in Scotland, the equivalent guidance is in IHTM15051 and IHTM15054.
This can become complicated when withdrawals are made. For this, the guidance says: 'When calculating this proportion, you should assume that any money withdrawn by each person should be set as far as possible against their own contributions, despite, the rule in Clayton's Case [1816].'
I have deliberately left in this reference to a court case over 200 years ago to demonstrate how far back we sometimes have to consider legal judgements.
At this point, I imagine some of you are wondering who is supposed to work all this out. The answer is that HMRC is entitled to make enquiries into the inheritance tax position of an estate, and the onus is on the executors to provide the evidence to support their view of the position.
It is the therefore a matter for you to keep the necessary documentation, including records of transactions into and out of the joint account, and ensure that your executors know where these are kept.
If large amounts are involved, it would be worth consulting a solicitor who might advise setting up a finance lasting power of attorney.
As the HMRC guidance to inspectors explains: 'When establishing the share based on the deceased's contributions you should note that the true legal position is far from clear so it is important to establish the facts and obtain any relevant documents, such as application forms, withdrawal mandates, passbooks, terms and conditions of account before considering the legal and equitable rules.'
As it happens, a case came before the courts a few years ago where there was a shortage of the appropriate documentary evidence. The judges decided that the inspector was entitled to ascribe an equal beneficial ownership by the father and son.
So, in my view, if all you do is open a joint account with you and your daughter named and put funds into it, on your death you will remain the beneficial owner and the money will form part of your estate for inheritance tax purposes.
However, if you make a declaration that the beneficial ownership rests entirely with your daughter, this will count as a lifetime gift to her at that time. In the event of your death within seven years the gift will then fall back into your estate under the general seven-year rule.
I realise that all this can become complicated and some advisers are wary of joint accounts for this reason. Nevertheless, in my view joint accounts can be very useful in the right circumstances.
For example, I think a couple who are married or in a civil partnership should consider having at least one bank account in joint names into which regular income flows. In the event of one dying, the survivor then has full control of the account without having to wait for probate. As you will appreciate, transfers between spouses and civil partners are automatically free of inheritance tax.
A joint bank account can have other advantages. In particular, some banks have become reluctant to hold accounts for non-residents.
One of my relatives has lived overseas for many years and chooses to keep most of his investments in the UK. I manage these for him and we have a joint UK bank account to collect the dividend income with all the money in the account arising from his investments. He retains full beneficial ownership and on his death this balance would fall into his estate for inheritance tax purposes.
This is not a straightforward matter and I genuinely welcome comments from anybody who disagrees with my analysis. Likewise, I am hoping that some readers will be able to contribute with their practical experiences of dealing with HMRC on this issue.
Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired. His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.