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Does the seven-year rule apply to jointly gifted assets?

A reader seeks guidance on a finer point of inheritance taxation
Does the seven-year rule apply to jointly gifted assets?

I can’t find details on how the application of inheritance tax (IHT) to a married couple, who jointly give money to grandchildren, is accounted for if one survives for seven years and the other doesn’t. It seems difficult or impossible to predict who has the better chance of surviving. My wife and I are both in our 82nd year. 

Stephanie Court, Private Client Tax Director at RSM UK

The gift of cash to a grandchild is reflected in the principles of IHT through the concept of a transfer of value. A transfer of value, put simply, is a disposition made by a person as a result of which the value of their estate has decreased.

The starting point therefore is to determine the amount of the property which would be reflected in the donor’s estate before the transfer, and the loss to that estate after the transfer. The loss to the estate is the value of the gift.

If there has been a gift of cash, the value transferred is easy to determine, but in the case of a joint bank account, applying the IHT provisions to determine the value transferred by each party is more difficult. How do you determine what proportion of the joint account each party is beneficially entitled to, and therefore how much of that joint account forms part of their estate from which the loss of value occurred?

Joint property is a common term for arrangements under which beneficial entitlement to assets is shared between two or more people. Usually, the assets will be held in the joint names of these people, for example a joint bank account or a jointly owned home. The beneficial entitlement to a house may sometimes be defined as a specific percentage in the deeds, but the beneficial entitlement of one of the holders of a joint bank account is rarely defined in the same way.

It may be reasonable to assume that the beneficial entitlement to a joint bank account is split equally between the account holders, but this is not strictly the case. HM Revenue & Custom's (HMRC's) guidance states that each holder of a joint account is normally regarded as beneficially entitled to the proportion of the account which is attributable to their contributions to it. This is the case even where both bank account holders have complete access to withdraw all the funds. Therefore, if one party contributed all the funds, the whole balance of the account is included in their estate, and consequently none of the balance is included in the estate of the other joint holder.

Withdrawals made by person A from the funds provided by person B could therefore be treated as lifetime transfers. Where joint accounts are held by spouses or civil partners, this is usually of no consequence as transfers between spouses or civil partners are generally specifically exempt from IHT. However, where a transfer of value occurs and no exemption is available that transfer may become a chargeable transfer, for example if the donor does not survive seven years from the date of the gift. The loss in value of the estate of each joint bank account holder may then become relevant.

Therefore, in answer to the original question, how the IHT on a joint gift of cash is accounted for, depends on the beneficial entitlement of either party to the funds, based on how much either party contributed to the account.

At this point, it is worth stating that a gift using the annual exemption of £3,000, the small gifts exemption of £250, or gifts in anticipation of marriage or civil partnership allowance of up to £5,000 per child or £2,500 per grandchild, would all be exempt. Furthermore, gifts representing normal expenditure out of income may also be immediately exempt, and where a gift qualifies for this exemption, there is no monetary limit on it.

In calculating the IHT charge on death, the nil rate band amount (currently £325,000) is set against chargeable lifetime gifts in priority to the assets comprised in the deceased’s estate, and in priority order against the earliest gift first. Therefore, if any part of the gift is not exempt, it may be within the nil rate band so not be subject to an IHT charge.

HMRC’s internal guidance (IHTM15042) goes on to say that the true legal position in establishing a beneficial share of a joint bank account based on contributions to the account is far from clear, and that officers should avoid enquiring into the split in ownership unless the amount of tax at stake is substantial. This highlights how complicated the position can be.

If the gift is substantial, it would be sensible to record that a gift is being made and the value of it, and to make clear the amount being gifted by each of the donors. This is to provide reasonable evidence to help ease future complications in determining the IHT position should either donor not survive for seven years.