Inheritance tax issues with joint bank accounts

In the case of John Matthews (Executive and Trustee of the estate of Mrs Mary Jean Matthews Deceased) ([2012] UKFTT 658 (TC), published on 8 November 2012) the First-tier Tribunal (FTT) has determined that an intended gift from an elderly widow to her adult son was ineffective for inheritance tax purposes because the gift was made into a joint account of which she was a joint signatory.

Mrs Mary Jean Matthews (“Mrs Matthews”) – who died on 19 January 2007 – had in 1999 (i.e. more than seven years before her death) transferred the sum of £94,473.16 from an account in her sole name into a new joint account in the names of herself and her adult son, John Matthews.

On Mrs Matthews’ death, only one half of the money then in the account was returned as an asset of hers subject to inheritance tax; however, HMRC issued a notice of determination claiming that the whole account should be so liable.  John Matthews, as personal representative appealed against the notice.

Mr Matthews’ representative before the tribunal argued that there was a tenancy in common of the whole account, and that Mrs Matthews had made an absolute gift of only one half of the balance standing to its credit.  HMRC argued that there was a gift of the whole account as a joint tenancy and that because Mrs Matthews had the power, as a joint signatory, to control the whole account and because she had not been entirely excluded from benefit from the share in the account she had intended to give away (such that the inheritance tax ‘gift with reservation of benefit’ rules were in point), the whole account should be taxable.

The FTT rejected the ‘tenancy in common’ argument on the facts.  First, because the account submitted in relation to Mrs Matthews’ estate referred to the account as passing ‘by survivorship’ on her death (indicating a joint tenancy rather than a tenancy in common).  Secondly, because the FTT inferred from evidence provided by Mr Matthews that either he or the Deceased could withdraw all the funds for his or her own benefit.  In other words, the idea that each had a separate half share that the other was not entitled to benefit from was not accepted.  The whole account was therefore subject to inheritance tax.

The decision in this case follows the Special Commissioners decision in the case of Sillars, and another v IRC [2004] (SpC) 10 and, as such, it doesn’t really break any new ground.  What it does do, however, is to demonstrate again that although the UK has a  liberal inheritance tax system in relation to lifetime giving (e.g. with no upper cap on the value of ‘potentially exempt transfers’), care is always needed to make sure that the equally strict and far-reaching ‘gift with reservation of benefit’ rules are not breached.

In relation to cash gifts, it also demonstrates that transfers into joint accounts are fraught with technical difficulties and that the best course of action, to avoid any potential problems,  is to make gifts into the sole name of an intended donee.

For further assistance in relation to lifetime giving or inheritance tax planning phone TaxDesk on 0845 4900 509 and ask for Ian Maston.