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Joint accounts - Whose money is it?

Joint bank accounts may be a flexible and practical solution for the management of money on a day to day basis. Many couples have joint accounts to make paying bills and arranging household finances easier. It is not uncommon for elderly parents to ask one of their children to become a joint signatory on their bank account, to assist them in operating the account as they get older. However, joint accounts can present several problems if one of the account holders dies. These include quantifying the extent of the deceased's share of the funds, identifying who is entitled to receive those funds and ascertaining the inheritance tax treatment. 

Succession issues

Normally, the balance in a joint account will pass to the surviving account holder on death by right of survivorship, outside the terms of the deceased's Will. This is because almost all joint accounts will be held as "joint tenants" rather than as "tenants in common". Consequently, there is often no need to wait for probate; the survivor will simply provide the death certificate to the bank and it will transfer the money into the survivor's sole name. The normal mandate on a joint bank account provides for this and enables either of the named parties to withdraw the whole amount for his own benefit while they are both alive. However, although this may be the starting position as regards the account holders and the bank, the parties' rights as against each other may depend on what else they have agreed and the purpose for which the account was opened and how it has been operated.

The true position may require careful consideration. This can be a difficult job of piecing together the facts and circumstances, occasionally involving acrimony, as there is usually no written evidence to clarify the position. Joint accounts are often run on the basis of an informal mutual understanding between the account holders but once one of them dies, that may be difficult to ascertain. 

This was demonstrated in the recent case of Drakeford v Cotton and Stain [2012] EWHC 1414(Ch), where an elderly mother set up and fully funded a joint bank account with one of her daughters. It was agreed that when the joint account was established, the deceased had not intended to give her daughter a beneficial interest. However, over time, the mother's intentions changed since she made it clear to the daughter and to her son that the daughter should inherit the account after her death. The court came to this conclusion on a review of the surrounding circumstances including evidence that the mother had fallen out with her other daughter, and wished to disinherit her.

There is a long line of cases on joint bank accounts with a variety of different outcomes as each turns on its own facts. The parties' intentions are key but ideally the position should be properly documented.

Tax issues

Joint accounts are common between spouses and civil partners. While they are both alive, interest from a joint bank account is normally taxed 50/50 as they are treated as owning the funds in equal shares. If the funds are owned in unequal shares, they will still be taxed on the 50/50 basis unless they make a joint declaration to be taxed according to their beneficial interests. Other joint account holders will usually hold the funds as "joint tenants" and will also be taxed equally on the income unless in fact they hold the funds unequally as "tenants in common", in which case they will be subject to income tax on their share of the interest.

HMRC pays close attention to joint accounts after a death, particularly if there is a significant amount of tax at stake. They are not greatly interested in joint accounts held by spouses and civil partners where funds passing from one spouse or civil partner to the other are normally 100% exempt from inheritance tax.

However, for unmarried couples and other combinations of joint account holders, a greater degree of scrutiny will be required as to how much tax is due and who is liable for that tax. It can not be assumed that the deceased will be treated as owning 50% of the funds and that inheritance tax will only apply to that half share. Similarly, it can not be assumed that any inheritance tax due will be paid from the deceased's general estate; more often it will be payable by the surviving joint account holder if they inherit the funds by survivorship.

The Inheritance Tax Return that must be submitted after a death calls for a surprising amount of detail including:

  • the name of the other account holder and their relationship to the deceased;
  • the date on which the joint ownership began;
  • the amount provided by each joint owner;
  • how any income from the account was dealt with;
  • withdrawals from the joint account.

HMRC will normally regard each account holder as beneficially entitled to the proportion of the account attributable to their contributions. So, if the deceased provided all the money, the whole amount will be subject to inheritance tax on his death. The reservation of benefit rules are in point where a person places funds in a joint account with someone else and either receives all the interest or has the right to withdraw all the money (as is normally the case). Withdrawals generally count against each party's contributions but where there is a lot of activity on an account, it may be extremely difficult to unravel the movements.

Any withdrawals in excess of the funds provided by each joint owner will potentially constitute a gift to the other party. This in itself has inheritance tax consequences and may also be relevant for income tax purposes. Another recent case, Pflum v HMRC [2012] UKFTT 365 (TC), concerned the question of whether withdrawals from a joint bank account were taxable remittances. An account which was funded entirely by a non-domiciled UK resident was drawn on by his girlfriend in the UK. It was held that the withdrawals became the property of the girlfriend and at the time these were not taxable remittances by him.

However, since Finance Act 2008, the boyfriend would now be taxable on his girlfriend's withdrawals under the same set of circumstances as she would be a 'relevant person' in relation to him.

These recent cases serve as a reminder of some of the issues to be aware of with joint accounts, where the position may be more complicated than it first appears.

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