In a recent case, a sizeable joint bank account was left out of an

Inheritance Tax (IHT) calculation. The surviving signatory was landed

with a bill from the Taxman. What’s the problem with joint bank

accounts and how can you avoid it?

 

Joint account

 

The case of Smith & Others SPC00742 (Smith), heard by the HMRC Special Commissioners, involved IHT due on an estate. It was not so much about whether IHT was due, but who should pay it. However, it raises some important IHT planning issues that anyone with a joint bank account needs to be aware of.

 

The facts

 

Before she died, Mrs Smith changed a building society account into joint names with her son, Mr Malcolm Smith. But she did so on the understanding that she would remain entitled to all the interest earned on the account, and that he would become entitled to the capital when she died. It’s possible that this was an attempt at IHT planning by trying to get the capital out of Mrs Smith’s estate and into that of her son’s, while maintaining the income stream for herself.

 

Trap

 

If you retain the right to receive income from an asset, whether it’s a bank account or something else, its full value will remain chargeable to IHT as part of your estate.

 

Estate sorted

 

The executors of Mrs Smith’s estate calculated the value of her estate ignoring the joint bank account. The error was eventually discovered and the solicitors acting of the executors informed the Taxman. It was said that the account was originally overlooked because of a ‘misunderstanding’.

 

Trap

 

Where one of the joint beneficial owners of an asset dies, their share automatically passes to the other joint owner(s) outside the terms of their will (unless there’s an agreement by all the joint owners to the contrary). There’s often a misunderstanding that this also means that the value of an asset is also out side the estate for IHT. That’s incorrect. The value of all assets including those jointly owned must be taken into account.

 

Tip 1

 

If you want to pass the capital in a bank account to another family member, or anyone else, give them the money rather than add them as a joint name on the account. Don’t make the gift subject to conditions, e.g. that you still want to receive the interest. If you do, the capital will remain part of your estate for IHT purposes until those conditions are removed, and for another seven years after that.

 

Tip 2

 

There’s nothing to stop the person you gave the money to making gifts back to you on a regular bases. These could be more or less than the interest they earn on the money. But there must be no agreement giving you a right to receive the payments, otherwise you’ll fall into the first tax trap we mentioned above.

 

Tell the bank

 

It’s possible for a person to e named on an account without being entitled to the money in it. Banks offer special ‘trustee’ accounts to cater for this situation. They can also set up arrangements so that a person is merely a signatory to an account. If you want to use either of these two types of arrangement you’ll need to talk to your bank before you open the account.