Postby claymore » Thu Sep 28, 2006 10:26 am
It depends. There wouldn't be a tax liability on your wife as far as the capital in the account is concerned - Income Tax is only chargeable in income. Income Tax would be payable on the interest that the account generates.
Normally when an account is held in joint names, the interest is deemed to be divided equally between the account holders, unless an election is made at the bank for the split to be different. Such an election can only be made based on fact - if all of the money in the account belonged to your mother-in-law the account holders could elect that all of the interest is deemed to be hers. Your wife then wouldn't have to pay tax on the interest.
In any event, interest paid on a bank account is taxed before the bank pays it. Tax is deducted at 20%. For people who pay tax at the basic rate, no further tax is due. but people who pay higher rate tax (40%) have additional tax to pay.
If your wife is not a higher rate taxpayer, she wouldn't have anything extra to pay however the interest was split. If she is a non-taxpayer she might be able to register for her share to be paid gross (without tax taken off).
Because I don;t know the full facts, I recommend that your wife and her mother get advice from the bank before deciding what to do.