The client is trying to arrange arrange his affairs to help minimise his estate’s liability to IHT and wants to set up his savings account in joint names. What issues need to be addressed?
If only it were that simple! Three recent cases demonstrate the problems here.
The Sillars case
As part of an IHT planning exercise, in March 1995 a mother transferred her building society account into the joint names of herself and her two daughters. All the subsequent transfers into the account were made by or derived from the mother.
In transferring the account into joint names, the mother had intended to make an immediate gift. Interest on the account was returned for income tax purposes by the mother and her daughters equally, and each made income tax returns.
The mother died on 9 January 2002 and the IHT return stated that the account passed by survivorship to the daughters. One-third of the balance on the account was returned as the deceased’s share.
HMRC contended that the whole balance on the account was taxable under section 5(2) of the Inheritance Tax Act 1984, which subjects property to IHT where a person has a general power or authority. HMRC also argued that there had been a gift with reservation under section 102 of the Finance Act 1986.
The Taylor case
Prior to her death in December 2004, Kathleen Boland had placed two building society accounts into the joint names of herself and her brother-in-law, Peter Taylor. The operating instructions were that only one signature was required and that, on a death, the whole account would pass to the survivor. Tax deduction certificates were issued to the deceased and Mr Taylor showing Boland as the first named account holder and Mr Taylor as a joint investor/beneficiary.
Again, HMRC contended that the deceased was to be treated as beneficially entitled to the whole of the funds in the joint accounts at the date of death.
The Matthews case
Mrs Matthews closed her building society account and placed the proceeds into a joint account in the names of herself and her son. The operating instructions for the account were that only one signature was required in order to withdraw monies from the account.
Mrs Matthews and her son each declared half the total gross interest received each year on their tax returns. Mrs Matthews’ son contended that his mother had intended to make an immediate gift to him of one half of the monies, but there was no documentary evidence of this.
All the decisions went the way of HMRC as it was found that none of the accounts were tenancies in common and as all the deceased had a general power under the various accounts and therefore section 5(2) of the IHTA 1984 applied the whole balance on the accounts was taxable.
It was also found that what had been created were gifts with reservation. The accounts were held beneficially as joint tenants. Possession and enjoyment of the accounts had not been assumed by the other joint owners as the deceased persons had been entitled to a share, the accounts had not been enjoyed to the entire exclusion of those deceased and the benefits from the accounts were still enjoyed by those deceased.
The safest course of action to make an IHT effective gift would have been to make a gift of (a share of) their building society accounts to their respective donees who should have opened their own accounts in their own names with no ability for the donors to access the funds.
Some advisers feel that it is sufficient to place property (including life assurance policies) into joint ownership to make an IHT effective gift and to set the seven-year clock running. These cases show the dangers of that approach where a donor can continue to benefit from the asset.
Brian Murphy is financial planning manager at AXA Wealth