Question: My mother has opened savings accounts for her six grandchildren who range in age from four to 17 years. She has been diagnosed with dementia and my sister and I now have power of attorney. When it comes to the accounts for her grandchildren, are these considered to be the children’s, ie the money is not included in her estate, even where she is also named on the account?
We have a second question prompted by the fact that having looked over the accounts, we think the money could be put to better use elsewhere either in a higher-paying account or even bonds. If we transfer all the money say into a single savings account, will it still be considered to be the children’s? We suspect we won’t be able to open a single account in six names.
There is another reason why we wish to transfer the money: the amounts in the accounts vary considerably yet her stated intention was to give each child the same amount in a lump sum. By pooling the money we could, eventually, share the cash out evenly between them. But should we leave well alone and are we risking bringing the money back into the estate?
G Cameron
Rachel de Souza, Tax Partner, RSM, replies: There are a number of different elements to tease out from the questions posed. I suspect that these elements are common to many readers with parents who have given cash to grandchildren.
Firstly, how can we conclude that the funds belong to the children? For a gift to be valid for tax purposes, it has to be an outright gift with no benefit retained by the donor. In most cases, it will be obvious – for example, where a grandparent transfers £1,000 to a grandchild’s existing junior bank account. In an ideal world, this would be accompanied by a letter to the grandchild, confirming the gift. In such circumstances, there would be no doubt about the intention and what happened in practice and one could comfortably conclude that £1,000 has been gifted absolutely to the grandchild.
However, in this case, it appears that your mother has opened a new bank account in the joint names of the grandchild and herself. We are not given any further detail. Thus, did your mother intend to gift the amount in each bank account absolutely to each grandchild or did she intend for the funds to be jointly held? In other words is only half the amount in each account intended for each grandchild?
I would start with checking the precise name of each bank account; it could be that your mother is named only as ‘bare trustee’ or ‘nominee’. In both cases, it could be concluded that the account belongs absolutely to the grandchild and effectively your mother’s name appears for administrative convenience only. Alternatively, if your mother’s name appears in its own right, additional evidence would be required to reach a conclusion on who owns which funds.
Let us assume that the cash in each account belongs solely to the grandchild named on the account. You mention that your mother’s intention is to give each grandchild the same amount in a lump sum, however the account values vary considerably and you wish the children to share equally. It might well be your mother’s intention that each grandchild receives the same value. However, if we conclude that the value in each account belongs to each child, you cannot ‘reallocate’ one child’s pot to another as those funds are not yours or your mother’s to reallocate.
In this case, you would be stuck with the unequal distribution of value to the grandchildren. You may still pool the money, but as you must act in the best interests of each child, you will need to monitor the investment return and allocate it fairly – in this case, a pro-rata allocation would appear to be a sensible solution.
What about the inheritance tax (IHT) implications? We have not been given an idea of the amounts involved nor the time frame as to when these gifts were made. Firstly, everyone has an annual exemption of £3,000 for IHT purposes, so you can give away up to £3,000 each year without impacting on your IHT position (if you do not use your allowance in year one, it carries forward to year two but is then lost if not used). Thus if the gifts in total amounted to less than £3,000 per year, there is no impact on the death estate.
Where the cash gifts are in excess of the annual exemption, there is no IHT liability at the time of the gift, but there could be an IHT liability if your mother does not survive for a full seven years from the date of the gift. Due to this possibility of an IHT liability, these gifts are known as ‘potentially exempt transfers’ or PETs.
In cases where the donor does not survive the full seven years, the cash value of all gifts in the past seven years will be brought back into the calculation of the value of the death estate. If the total value of gifts in the seven years before death is less than £325,000, the gifts are covered by the deceased’s nil-rate band (NRB), the amount of value taxable at 0 per cent, and no further liability on the gifts arise (but do note that the value of the PETs reduces the NRB so the effect is that a larger proportion of the deceased’s assets held at death will be taxable at 40 per cent). However, if the total value is in excess of the deceased’s NRB, then an actual IHT liability will arise. The amount due depends on the time that has elapsed between the date of the gift and the death. If it is less than three years, IHT at 40 per cent will be due; for gifts between three and seven years a taper relief applies. It is worth noting that the IHT liability in these cases falls in the first instance on the donee not the donor.
Lastly, I want to return to the perceived unfairness of the unequal distribution of lifetime gifts to the grandchildren. Following death, and assuming there is a valid will, it is possible for the will beneficiaries to agree that the distribution of assets should be amended to that set out in the will. Thus, if all agree, a ‘Deed of Variation’ could be implemented, which will ensure that the disadvantaged grandchildren are compensated from the deceased’s estate.
