You may well feel that there is not much new to say about this topic, but a recently decided case highlights some potential problems of which we should all be aware.
The case in question is Sillars and another
IRC, which was heard before the Special Commissioners and concerns the potential implications of placing an asset into joint ownership. In March 1995, Mrs Marion Martin transferred her building society account into the joint names of herself and her two daughters. In taking this action, she had intended to make an immediate gift. Certainly the daughters regarded one third of the balance in the account as being their property. Interest on the account was returned for income tax purposes by Mrs Martin and her daughters equally and each made income tax returns.
However, all the subsequent transfers into the account were made by Mrs Martin. Withdrawals were made by cheque in respect of gifts to members of Mrs Martin’s family and by cash to cover Mrs Martin’s general expenses. Mrs Martin operated the account without reference to her daughters until she became ill, at which time one of the daughters kept the passbook and made the receipts and payments on behalf of her mother.
Mrs Martin died in January 2002. The Revenue contended that the whole balance of the account should form part of her estate. They based this contention on two areas of legislation. First, section 5(2) Inheritance Tax Act (IHTA) 1984 states that property is to be included in a person’s estate where that person has a general power of authority enabling him or her to appoint or dispose of that property as he or she thinks fit.
Alternatively, the Revenue stated that a gift with reservation under section 102 Finance Act 1986 had been made as possession and enjoyment of the account had not been enjoyed by the daughters, nor had the account been enjoyed to the entire exclusion of the donor – that is. Mrs Martin. The daughters appealed, contending that a tenancy in common existed and thus only the value of the initial gift made in 1995 should be taken into account.
The Special Commissioner held decisively in favour of the Revenue’s view. He felt that no true tenancy in common existed. Mrs Martin was able to dispose of the balance of the account as she thought fit. Withdrawals were made either to or for her benefit. There was no accounting at all to see whether or not Mrs Martin was taking more than her one third share of the account.
If she had needed more than one third of the initial balance, the excess would not have been a gift by her daughters as they did not have a general power over the account. Thus, section 5 (2) IHTA 1984 did apply and the whole balance of the account was taxable as part of Mrs Martin’s estate.
Furthermore, the Revenue were correct in believing that there was a gift with reservation. Possession and enjoyment had not been assumed by the daughters because Mrs Martin was still entitled to a share;
The account was not enjoyed to the entire exclusion of Mrs Martin; and The benefits from the account were still enjoyed by Mrs Martin.
The daughters’ appeal was therefore dismissed and the whole of the value of the building society account formed part of Mrs Martin’s estate on her death.
In talking to advisers around the country there does sometimes seem to be a feeling that it is just sufficient to place property into joint ownership in order to make an effective gift and to set the seven year PET clock ticking. This case shows the dangers of that approach in situations where the donor can continue to benefit from the asset being gifted away.
The safest course of action for Mrs Martin to have adopted had she wanted to make an effective gift for IHT purposes would have simply been for her to gift a third of the balance of her building society account in 1995 to each of her daughters and for them to have set up their own accounts in their own names with no ability for Mrs Martin to access monies in those accounts.
As with all IHT planning, care and good advice is needed.