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Where Taxpayers and Advisers Meet

IHT and Joint bank accounts

NeilD
Posts:7
Joined:Wed Nov 17, 2021 9:46 pm
IHT and Joint bank accounts

Postby NeilD » Wed Nov 17, 2021 10:00 pm

Got an interesting scenario here which I hope somebody can help with.

An elderly relative recently passed away. She has one surviving son and died intestate.
She had a few properties and the estate has crossed the 40% IHT threshold, so there's a liability of around £200K from the properties.
She also had a joint bank account with her sister which has a balance of around £100K.
All the funds in that bank account were deposited by the deceased and, up to her death, the only person who withdrew funds was the deceased.
She had no other assets.

It would appear that the joint account forms part of the estate from an IHT perspective meaning an aggregate IHT liability of £240K.
Control of the bank account will go to the sister from a survivability perspective.

So here are the questions :

o Given that the £100K forms part of the estate from an IHT perspective can that cash [in it's entirety] be used to pay a portion of the £240K liability ?
o If so, how do HMRC collect those funds ? Do they pursue the sister ? How are they informed of this ?
o If that's not the case, how does the process work ?

Thanks in advance.

pawncob
Posts:4877
Joined:Wed Aug 06, 2008 4:06 pm
Location:West Sussex

Re: IHT and Joint bank accounts

Postby pawncob » Thu Nov 18, 2021 1:46 pm

https://www.funeralguide.co.uk/help-resources/managing-your-estate/letters-of-administration
With a pinch of salt take what I say, but don't exceed your RDA

iwmtaxadvisor
Posts:42
Joined:Wed Sep 09, 2020 5:12 pm
Contact:

Re: IHT and Joint bank accounts

Postby iwmtaxadvisor » Thu Nov 18, 2021 3:52 pm

Given that the £100K forms part of the estate from an IHT perspective can that cash [in it's entirety] be used to pay a portion of the £240K liability ?


No, on the basis of what you've said alone, not in its entirety. Only 50k, and only the estate is liable.
Unless you meant - can the sister elect to pay tax on her own legacy... don't think you meant that.

Other remarks
- you've included the nil rate residence band relief? Just maybe, times two.
- one can possibly deduce that the deceased must have made lifetime gifts into the joint account. If within 7 years, include in the IHT calc
- unless of course you can claim any exemption

I think I need a course in BBCode formatting
Robert Noble-Warren CTA, FCIS
wealth updates for high net worth families

NeilD
Posts:7
Joined:Wed Nov 17, 2021 9:46 pm

Re: IHT and Joint bank accounts

Postby NeilD » Thu Nov 18, 2021 6:03 pm

@iwmtaxadvisor

Thank you for your reply, really appreciate it.

If the joint account was fully funded by the deceased, my understanding is that 100% of the value of that account, not 50%, forms part of the deceased's estate for IHT purposes [see the links below]. The sister did not fund the account nor did she make withdrawals from it.

Yes you're correct I didn't mean anything regarding the sister's legacy. This is only related to the deceased's estate.

In answer to your other remarks.
o Yes the NRB relief has been included.
o The account was opened and funded during the last 6 years solely by the deceased. The deceased had been making withdrawals - expenditure only, no gifts. The sister had neither funded nor withdrawn from the account.
o No exemptions can be claimed. The IHT position is pretty clear other than this issue.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm15042

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm15011

AGoodman
Posts:1417
Joined:Fri May 16, 2014 3:47 pm

Re: IHT and Joint bank accounts

Postby AGoodman » Fri Nov 19, 2021 6:31 pm

As you suspected, the survivor (i.e. the sister) is liable to pay the tax on the jointly owned asset. You would apply the overall estate rate (which gives her the partial benefit of the nil rate bands) to the monies in the joint account.

Sister is primarily liable but if she did not pay, HMRC can in theory go after the estate administrators as well.

NeilD
Posts:7
Joined:Wed Nov 17, 2021 9:46 pm

Re: IHT and Joint bank accounts

Postby NeilD » Sat Nov 20, 2021 1:54 pm

@AGoodman Thank you so much for the reply here.

I had two separate discussions with HMRC yesterday and the outcome was quite interesting.

o The cash in the account forms part of the deceased's estate from an IHT and is fully liable, so in this instance it's around £40K.

o HMRC DO NOT pursue the owner of the bank account [i.e. the sister] for the IHT payment but rather the executor ! HMRC are not interested in whether the executor is able to secure the funds in that account or not, the executor is liable for the IHT payment and needs to use 'all means possible' to pay it.

Given that the sister is unwilling to revert the funds back to the estate, the HMRC discussion centred around the liquidation of the property to settle the debt. I explained that there was a catch 22 situation here in that the executor would be unable to raise funds [via loan or otherwise] against to settle the IHT debt prior to probate [or in this case letters of administration] as a lender will not entertain a loan where they can't take a charge over the asset. HMRC said that it may be possible to apply for a grant of credit in order to delay the payment... but that is rarely issued and it will always come with a condition such as the immediate sale of the property.

So in summary, the executor is liable for IHT on an asset that's considered part of the estate, without having access to or control over that asset. FURTHERMORE because it's a liquid asset, the full amount of IHT here needs to be paid on submission of the IHT400 ! The sister has effectively received the £100K completely tax free as it's bypassed the will AND IHT process.

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: IHT and Joint bank accounts

Postby maths » Sat Nov 20, 2021 3:52 pm

Joint bank accounts for IHT purposes can in fact be somewhat more complex than is often realised.

The exact nature of the jointly held bank account of deceased and sister is I believe unclear.

Prima facie, if the deceased provided all the funds and only the deceased withdrew monies then the whole of the beneficial interest in the bank account belonged to the deceased on death, not 50/50 or some other split with the sister. The sister having no beneficial interest in the monies. Accordingly, the survivorship rule has no application.

On this basis, the deceased's estate (which would include 100% of the account monies) would be liable for IHT on the monies.

Not only is this the case, but under the intestacy rules the deceased's son inherits everything including the account monies and the sister inherits nothing.

NeilD
Posts:7
Joined:Wed Nov 17, 2021 9:46 pm

Re: IHT and Joint bank accounts

Postby NeilD » Sat Nov 20, 2021 8:57 pm

@maths Thank you so much for your reply.

That's very interesting and appears logical. If the joint bank account is treated as part of the estate from an IHT perspective, you would imagine it actually is part of the estate and should fall under the intestate process which is absolutely clear in that the son inherits everything.

However, does survivorship trump intestacy rules ? I believe it trumps a will.

Could the sister claim that the monies were gifted to her on the death of the deceased - even though that's not the case - and the situation would then be a failed PET.

What would the son need to do in order to have the funds returned to the estate, pursue the sister through the high court for monies ?

Thanks again for the replies here... it's certainly one of the more intriguing IHT situations I've encountered.

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: IHT and Joint bank accounts

Postby maths » Sun Nov 21, 2021 8:39 pm

However, does survivorship trump intestacy rules ?
Yes, survivorship "trumps" the intestacy rules. However, it is crucial to appreciate the difference between legal and beneficial ownership.

X and Y may hold the legal title to a bank account ie each name is on the account. Technically, X and Y are bare trustees who hold the beneficial interest in the account for X alone as it is X who provided monies for the account and who withdrew monies as and when. Y holds no beneficial interest in the account.

On X's death, under the survivorship rule Y acquires sole legal title. However, the beneficial ownership was not held jointly as all the monies belonged to X. As a consequence, the beneficial interest in the account does not pass by survivorship to Y. X is able under X's will to leave the monies in the account to whoever X wants; if X left no will then X's beneficial interest passes under the intestacy rules.

If the above reflects the facts then the person(s) who took out a grant of letters of administration following the death (as there was no will) is/are responsible for administering the deceased's estate. This should have included an investigation as to the precise relationship and nature of the jointly held bank account in order to determine whether the sister should have acquired the monies qua survivorship or not. Assuming that she should not have acquired the monies then the beneficiary(ies)who should have inherited can require the person(s) who took out the grant to make good their loss.

AGoodman
Posts:1417
Joined:Fri May 16, 2014 3:47 pm

Re: IHT and Joint bank accounts

Postby AGoodman » Mon Nov 22, 2021 11:36 am

Putting maths' arguments to one side (without prejudice!), it seems HMRC are right and the executors are primarily liable for IHT on the joint account (s.200 IHTA).

However, if the sister refuses to pay her share of inheritance tax or reimburse it to the executors, the executors do have a claim against her for it (a badly worded s.211(3) IHTA). Whether you want to be threatening/bringing such a claim depends on the wider circumstances but you can certainly show her that she should be reimbursing it and can follow up with a legal claim if necessary.


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