If you give away money or other possessions to someone else, you would think that would be the end of it – but a recent court case shows this may not be the case for expats.
The latest gift to come under scrutiny by HM Revenue and Customs (HMRC) is adding a friend or relative as a signatory to a bank account, just in case of an emergency.
The issue is whether a gift comes with strings attached – in which case it is not really a gift, so should be added in to an estate on death for inheritance tax purposes.
British inheritance tax laws allow anyone to give away whatever they want during in their lifetime, subject to ‘potentially exempt transfer’ (PET) rules and some annual caps and limits.
After seven years no inheritance tax is due on a PET – but a tax charge is due on a sliding scale if the donor dies within seven years of making the gift.
Tax trap for expats
One of the tax traps is a ‘gift with reservation of benefit’ – and one ripe for expats who add a signatory to a UK bank account who can pop in and sort out any problems.
To avoid inheritance tax, the gift must be unconditional – the person gifting must have no control over the money or asset afterwards – but adding someone to a bank account still gives the expat control of the money, so keeps everything in the account subject to IHT on their death.
The First-Tier Tribunal (FTT) ruled along these lines in the case of Mary Matthews, who died in January 2007, but more than seven years earlier, in 1999, had transferred £94,476.16 from an account in her sole name into a joint account with her son, John Matthews.
When she died, half the money in the account was returned as an asset of hers which would be subject to inheritance tax.
HMRC then issued a notice of determination claiming that the whole of the joint account was liable for inheritance tax.
Give up control
Before the tribunal it was argued that there was a ‘tenancy in common’ of the whole account and that Mrs Matthews had made an absolute gift of only one half of the balance.
HMRC said there was a gift of the whole account because Mrs Matthews was a co-signatory and she had not been excluded from benefiting from a share in it, therefore the whole account was taxable.
The FTT rejected the ‘tenancy in common’ argument because the account passed ‘by survivorship’ on her death which, they said, indicated a joint tenancy rather than a tenancy in common. They also noted that Mr Matthews and his mother could withdraw all of the account funds for their own benefit, so she maintained control over the money which indicated the arrangement was not a gift.
Essentially, when granting a gift, give directly to the person who is benefiting so it’s a clear transaction and relinquish any control over the cash or asset.
It is worth pointing out that Taper Relief only applies on gifts over the IHT allowance, so any PET made that is under the allowance will not qualify for relief. Perhaps the best way to deal with that is to take out a level term assurance policy for 7 years (in trust) to cover the “potential” IHT payable on the gift below the threshold. For gifts over the threshold, then a suitable Inter Vivos life policy ( in trust) should do the trick.
Very good point Chris