News | June 25, 2024

Joint bank accounts – how are the funds treated for IHT purposes?

When one of the owners of a joint bank account dies, the funds in the account will usually pass to the other joint owner(s) automatically by survivorship.

It is important to be aware, however, that for inheritance tax (“IHT“) purposes, HM Revenue and Customs (“HMRC“) treat each joint account holder as beneficially entitled to the proportion of the account which is attributable to their contributions. It follows, therefore, that if the deceased provided 100% of the funds to the account, then 100% of the balance in the account at the date of death would be treated as part of the deceased’s estate for IHT purposes. 

If the account holders do not contribute equally to a joint account, this can lead to complications with IHT calculations, particularly if sizeable gifts have been made from the account in question before death. Furthermore, where the joint account is held by spouses or civil partners (or by a parent and an adult child) who make unequal contributions, the presumption of advancement could apply to deem the transfer by the donor spouse/civil partner or parent as a 50% gift to the donee spouse/civil partner or child. The presumption of advancement is now regarded as weak and is due to be abolished by a new section (not yet in force) of the Equality Act 2010.

It would therefore be helpful for joint account holders who make uneven contributions to their account to put in place a declaration of trust to document the beneficial ownership of the funds in the account, if they want to ensure that these are held equally for IHT purposes. This is particularly important for joint account holders who are not married or in a civil partnership, as in those cases, the IHT spouse exemption would not apply, and this could have unintended consequences for the IHT payable on the death of the first account holder.

For more information about this or any other lifetime planning queries, please contact your usual WB adviser.