Mark McLaughlin CTA (Fellow) ATT TEP points out that joint investment accounts can cause some difficulty for Inheritance Tax purposes - with a risk that funds can be taxed twice.
If two individuals hold a joint bank account, how much of the funds in that account do they ‘own’ for Inheritance Tax (IHT) purposes? The instinctive answer for many will be "50%". However, as with most tax questions the answer is not necessarily that straightforward.
The legislation (IHTA 1984 s 5) defines one's "estate" for IHT purposes. In the context of joint accounts, the relevant provision is generally s 5(2), which deals with general powers over property:
"(2) A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money; and for this purpose “general power” means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit."
"Property" is defined for IHT purposes as follows (IHTA 1984 s 272):
"“property” includes rights and interests of any description but does not include a settlement power."
In other words, it could be argued that each joint owner owns ALL of the property for IHT purposes!
However, HM Revenue & Customs’ (HMRC's) guidance potentially restricts the scope of any IHT charge on the account (IHTM15042):
"In most cases each joint owner has an unrestricted right to withdraw any part of the amount in credit in the account and keep the funds for their own use (for example, see Re Bishop  Ch 450). You should not use the fact that this right exists to argue that tax is due (for example, by referring to the definition of ‘property’ in IHTA 1984 s 272 or the ‘general power’ provision in IHTA 1984 s5(2)) on a share of the account that is greater than the share provided by the joint owner..."
HMRC provides the following example:
“Andrew, Bill and Claire share a joint account. They all contribute to it. Andrew dies and his proportion of the account passes by survivorship to Bill and Claire. After Andrew’s death, the entitlement of Bill and Claire should take into account Andrew’s contributions.”
What TYPE of Joint Account?
However, what is the position if one joint account holder has provided the whole of the funds?
In Matthews (Executor of Mrs MJ Matthews’ estate) v HMRC  UKFTT 658 (TC), the appellant, Mr Matthews, appealed against a determination by HMRC that the whole of the funds in an Abbey investment account in the names of Mr Matthews and the deceased (his late mother) were liable to IHT as part of the deceased’s estate under IHTA 1984 s 5(2), or under the ‘gift with reservation’ anti-avoidance provisions.
The deceased initially held funds in an account in her sole name. In 1999, the deceased opened a new account with Mr Matthews at Abbey plc. She withdrew all the monies in the account in her sole name, and deposited them in the new joint account. The account instructions included that either the deceased or Mr Matthews could withdraw monies from the account without the other’s signature being required.
From the date on which the account was opened in October 1999 until the deceased’s death in January 2007, no withdrawals were made from the account. The only deposits after the deceased’s initial transfer into it consisted of interest credited and small account bonuses.
It was contended on Mr Matthews’ behalf that there was a ‘tenancy in common’ of the whole account, and that the deceased had made an absolute gift of one-half of the account balance. It was submitted that the deceased had no right to withdraw more than one half. In addition, the deceased and Mr Matthews had each declared one-half of the account interest in their Income Tax returns. It was further submitted that there was no gift with reservation. This was on the basis that the subject matter of the deceased’s gift was one-half of the account balance. Furthermore, had the deceased withdrawn more than her one-half entitlement, she would have had to account for any excess, and she could not have benefitted from Mr Matthews’ share of the funds.
The tribunal followed the approach in an earlier case, Sillars and Another v IRC , SpC 10, by analysing what type of joint account was involved. For example, there are joint accounts where the deceased retained ownership of the funds, and no gift was made until death. On the other hand, there are other joint accounts involving a tenancy in common with each joint holder having separate ownership of a separate share in the account. Unfortunately for the appellant, the tribunal could not conclude from the evidence that the arrangements constituted a tenancy in common. The inference was that either Mr Matthews or the deceased could withdraw funds up to the total amount of the deposit for their own benefit.
The tribunal therefore considered that IHTA 1984 s 5(2) applied. In addition, the tribunal held that there had been a gift with reservation by the deceased. This was on the basis that there had been a gift of the whole of the initial account balance, and that possession and enjoyment of the account had not been assumed by Mr Matthews because the deceased was still entitled to a share. The account had not been enjoyed to the exclusion of the deceased and of any benefit to her (e.g. interest) either. The appeal was therefore dismissed.
Lack of Evidence
In cases involving family members, there will often be a lack of evidence of the parties' intentions. The tribunal judge in Matthews commented that for an account involving mother and son, he did not expect the parties to keep records showing the ownership of the funds and the arrangements in place for withdrawals. However, he would have expected an explanation of what understanding existed between Mrs Matthews and her son.
Unfortunately, HMRC's information standards appear to be higher - continuing IHTM15042 from above:
"...When establishing the share based on the deceased’s contributions you should note that the true legal position is far from clear so it is important to establish the facts and obtain any relevant documents, such as application forms, withdrawal mandates, passbooks, terms and conditions of account before considering the legal and equitable rules. Where the account holder has a joint account governed by Scots Law you should consider the guidance at IHTM15051 and IHTM15054. Refer to Technical Department, any case in which the taxpayer or agent disputes the claim.
Remember you do not need to consider the question if the deceased’s interest passes to an exempt beneficiary, such as a surviving spouse or civil partner (IHTM11032). You should also avoid enquiries on this subject unless the amount of tax at stake is substantial."
Joint accounts between spouses and civil partners will not normally attract HMRC's interest, due to the exemption for transfers between them (IHTA 1984 s 18). However, care is needed in respect of joint accounts with non-exempt joint account holders, such as other family members.
Finally, it is interesting to note that the tribunal in Matthews referred to a comment by the Court of Appeal in Melville v IRC  EWCA Civ 1247:
“A clear example [of a provision of the Inheritance Tax regime that produces double taxation] is one falling within s 5(2) of the 1984 Act, the very common case of a joint bank account which permits any holder to draw on that account. The same property, the moneys in the account, is under s 5(2) taxable on the death of each holder”.
In the Squire Sanders UK Tax Bulletin (November 2012), Peter Vaines makes the following observation on this point:
"Despite this statement, it is explained in the Revenue Manuals that HMRC would not seek to charge Inheritance Tax on the account twice but would attribute the account to the person who provided the funds. (That is all very well, but it does not deal with the growth in value of the fund - to whom is that attributed?)"
The general rule on joint accounts (certainly between individuals who are not spouses or civil partners) for IHT purposes would therefore be to avoid them if possible, albeit that there may be non-tax reasons why they are sometimes necessary.