INHERITANCE TAX – joint bank account between the Deceased and her two daughters – finding that this was held beneficially as joint tenants and that the Deceased had made an immediate gift of a fluctuating and defeasible amount consisting of the balance from time to time – whole amount liable to inheritance tax either under IHTA 1984 s. 5(2) or as a gift with reservation – appeal dismissed
THE SPECIAL COMMISSIONERS
MRS BARBARA ANNE SILLARS AND MRS DIANA DEEPROSE Appellants
- and -
THE COMMISSIONERS OF INLAND REVENUE Respondent
Special Commissioner: DR JOHN F AVERY JONES CBE
Sitting in public in London on 1 March 2004
Andrew Miller, solicitor, Gulland & Gulland, for the Appellant
Peter Twiddy, Assistant Director, Capital Taxes Office for the Respondents
© CROWN COPYRIGHT 2004
DECISION
This is an appeal by Mrs B A Sillars and Mrs D Deeprose against Notices of Determination to inheritance tax dated 2 December 2002 that the whole of the funds in Nationwide Building Society account 0287/466910449 (the Account) in the joint names of Marion Joan Louise Cheshire Martin (the Deceased) and the Appellants was liable to inheritance tax either under section 5(2) of the Inheritance Tax Act 1984 or as a gift with reservation. The Appellants were represented by Mr Andrew Miller, and the Revenue by Mr Peter Twiddy.
There was an agreed statement of facts as follows:
The Deceased was born on 9 July 1908 and died on 9 January 2002. She was widowed on 13 April 1973, and lived at 160 Ashford Road, Bearsted, Maidstone, Kent ME14 4NB.
On 2 March 1995 the Deceased made gifts of cash, £10,000 each, to each of her daughters, the Appellants.
On 13 March 1995, the Deceased transferred the Account into the joint names of herself and her two daughters. At that date the Account held £43,701.
The entries in the pass book for the Account show a number of withdrawals. Some of these withdrawals represent small regular gifts by the Deceased to members of her family. Other withdrawals were made to cover the Deceased’s general expenses and the amount of each of these withdrawals ranged between £50 and £250. More recently, during the final year, some of the costs of the care fees for the Deceased were paid from the Account.
All of the subsequent transfers into the account were made by or derived from the Deceased.
Withdrawals were made by cheque in respect of the gifts to members of the Deceased’s family and by cash to cover the Deceased’s general expenses. The withdrawals were made initially by the Deceased personally, but in later years the withdrawals were made by either Mrs Sillars or Mrs Deeprose on behalf of the Deceased. The authority of one named person alone was required. No withdrawals were made by Mrs Sillars or Mrs Deeprose other than on the Deceased’s behalf.
Interest on the account was returned for income tax purposes by the Deceased and her two daughters equally. Income tax returns were made by each of them and were prepared by Messrs Larkings of Cornwallis House, Pudding Land, Maidstone, Kent ME14 1NH, the accountants instructed by each of them.
All parties were liable for income tax at the basic rate. The Deceased was subject to higher rate income tax in each of the years involved, and Mrs Sillars was subject to higher rate income tax for the years 1995/96 to 1998/99 inclusive.
The Deceased had two accounts with HSBC Bank plc at her death, a current account with a credit balance of £12,540 and a deposit account containing £5,878 at the date of death.
The deceased’s gross taxable income for the years from 1995/96 to 2000/01 inclusive was as follows:
£
1995/96 28,367
1996/97 32,422
1997/98 42,787
1998/99 47,427
1999/00 46,898
2000/01 48,238
I heard evidence from both the Appellants as a result of which I find the following further facts:
The gift of cash on 2 March 1995 and the transferring of the Account into the joint names of herself and the Appellants were part of an inheritance tax planning exercise on the advice of the Deceased’s accountant. Both Appellants were involved in discussions leading up to the cash gift and the transferring of the Account into joint names. In putting the Account into joint names the Deceased intended to make an immediate gift.
Initially the Deceased operated the Account without reference to the Appellants. She paid in quarterly rent cheques and investment income, for example a receipt of £7,938.67 on 16 October 1995. When the Deceased became ill Mrs Sillars had the pass book and made the receipts and payments on behalf of the Deceased. The effect of additions and withdrawals was not discussed. Mrs Deeprose lived in France and was less involved with the operation of the Account but had some knowledge of these on her visits.
As might have been expected within a family, there is no record of precisely what type of gift was intended. When questions relating to additions to the Account by the Deceased and payments to or for the benefit of the Deceased were put to the Appellants they clearly had not considered how these were treated. They regarded one-third of the balance in the Account as theirs.
The Appellants did not need to withdraw any funds from the Account.
The balance on the Account increased to a maximum of £75,520.51 on 2 November 2000 and had reduced to £62,832 at the date of death of the Deceased.
The income tax returns were made on the advice of the same accountant who had advised the Deceased on setting up the Account.
Section D4 of the inheritance tax return stated that the Account passed by survivorship. One third of the balance on the Account was returned as the Deceased’s share.
Mr Twiddy contended that the whole balance on the Account was taxable under section 5(2) of the Inheritance Tax Act 1984:
“A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money; and for this purpose ‘general power’ means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit.
That provision has been applied to joint accounts by the Special Commissioner (Mr O’Brien) in O’Neill v IRC [1998] STC (SCD) 110 as an alternative if he was wrong in finding that the other joint owner did not have any beneficial interest until the deceased’s death. In addition the Court of Appeal said (obiter) in Melville v IRC [2001] STC 1271, 1280c that:
“A clear example [of a provision of the inheritance tax regime that produces double taxation] is one falling within s 5(2) of the 1984 Act, the very common case of a joint bank account which permits any holder to draw on that account. The same property, the moneys in the account, is under s 5(2) taxable on the death of each holder.”
Alternatively, he contended that there has been a gift with reservation. Section 102 of the Finance Act 1986 applies:
“(1) …where, on or after 18th March 1986, an individual disposes of any property by way of gift and either—
(a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period [here the period from the gift to the date of death]; or
(b) at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise;….”
(2) If and so long as—
(a) possession and enjoyment of any property is not bona fide assumed as mentioned in subsection (1)(a) above, or
(b) any property is not enjoyed as mentioned in subsection (1)(b) above,
the property is referred to (in relation to the gift and the donor) as property subject to a reservation.
(3) If, immediately before the death of the donor, there is any property which, in relation to him, is property subject to a reservation then, to the extent that the property would not, apart from this section, form part of the donor’s estate immediately before his death, that property shall be treated for the purposes of the 1984 Act as property to which he was beneficially entitled immediately before his death.”
He contended that the gift was of the chose in action consisting of the whole Account. On that basis, possession and enjoyment of the Account had not been assumed by the Appellants, and nor had it been enjoyed to the entire exclusion of the Deceased and of any benefit to her.
Mr Miller contended that there was a tenancy in common of the Account. The initial gift was of two-thirds of the balance. The Deceased had no right to withdraw more than her one-third and had she done so would have had to account to the Appellants for any excess. The Appellants had a right to withdraw their one-third each from the Account. If they had withdrawn more they would have had to account for the excess. The income tax treatment was a factor to be taken into account.
He contended that it would be illogical if each joint owner of a joint account were taxable on the whole under section 5(2), as pointed out in Dymond’s Capital Taxes paragraph 10.433. Section 5(2) did not apply where the power was held in a fiduciary capacity (see the Financial Secretary’s statement quoted in Dymond paragraph 3.208) and here if more than the Deceased’s one-third was withdrawn the excess would be held in a fiduciary capacity to account to the Appellants (and if they failed to exercise their right to require this, they would be making a transfer of value by section 3(3) of the 1984 Act). The Deceased had other income and bank accounts and had no need to withdraw more than her share. Since for most of the time Mrs Sillars had possession of the pass book the Deceased would not have been able to withdraw funds without reference to her.
He contended that there was no gift with reservation. The subject matter of the gift was two-thirds of the balance of which possession and enjoyment was assumed by the Appellants. If the Deceased had withdrawn more than her one-third share she would have had to account for the excess and could not have benefited from the Appellants’ shares.
Reasons for the decision
One must start by analysing what type of a joint account this is. At one end of the spectrum is a joint account where the deceased retains ownership of the funds and no gift is made until death, as in Young v Sealey [1949] 1 Ch 278, either as a convenience for obtaining the immediate use of the funds after death, or for more sinister motives as in O’Neill v IRC. This is not the case here as an immediate gift was intended. At the other end of the spectrum is a tenancy in common with each joint holder having ownership of separate shares, as submitted by Mr Miller. That does not seem to be the case here. That would have required accounts to be kept of who owned the funds and would have required an understanding by the parties, which is lacking, of how deposits and withdrawals were dealt with. It is also inconsistent with the inheritance tax return which said that one-third of the balance at the date of death passed (beneficially) by survivorship. The amount would be one-third only if all deposits were a gift by the Deceased and all withdrawals to or for the benefit of the Deceased were gifts by the Appellants, which was not considered by any of them; and the Deceased’s share would not have passed by survivorship.
It seems to me that the facts found point to the type of account of which Megarry J suggested, without having to decide, in Re Figgis [1969] 1 Ch 123, 149F:
“It may be that the correct analysis is that there is an immediate gift of a fluctuating and defeasible asset consisting of the chose in action for the time being constituting the balance in the bank account.”
That seems to fit the understanding of the Appellants that each had an entitlement to one-third of the balance from time to time, and the operation of the Account entirely for the Deceased’s benefit, and may also be consistent with the income tax treatment, but that does not arise in this appeal. I infer from the way the Account was operated that it was understood that the Deceased, but not the Appellants, could withdraw funds from the account for her own benefit.
On that basis, I agree with Mr Twiddy’s contention that section 5(2) of the 1984 Act applies. While the Deceased’s power over the account was not a general power in the ordinary sense, it fits the definition. The Deceased was able to dispose of the balance as she thought fit. All the withdrawals were made either to or for the benefit of the Deceased. The joint account was plainly not settled property. There was no accounting to see whether the Deceased was taking more than her share. I do not accept that if the Deceased had needed more than one-third of the initial balance the excess would have been a gift by the Appellants. It is much more realistic to regard the Deceased as having power to deal with the Account as she thought fit. Whether or not section 5(2) can produce cases of double taxation does not arise in this appeal and on the facts found this is not a case where double taxation could arise. I do not consider that the Appellants had any such general power.
I also agree with Mr Twiddy’s alternative argument of a gift with reservation. The account was held beneficially as joint tenants. The gift was a gift of a chose in action consisting of the whole Account, not two-thirds of the initial balance. It follows that possession and enjoyment of the Account had not been assumed by the Appellants because the Deceased was still entitled to a share; and nor had it been enjoyed to the entire exclusion of the Deceased and of any benefit to her as all benefits from the Account were enjoyed by the Deceased.
Accordingly, I dismiss the appeal and confirm the Determination appealed against.
J F AVERY JONES
SPECIAL COMMISSIONER
SC 3114/03
Authorities referred to in skeletons and not referred to in the decision:
Ingram v IRC [1999] STC 37
IRC v Eversden [2002] STC 1109