Bank or building society accounts are often held in the joint names of two or more individuals, most commonly spouses or civil partners, or possibly between family members such as father and daughter. The question which arises income tax purposes is: how much interest is taxable on each account holder?
The legislation dealing with the income tax liability on interest income is in ITTOIA 2005, s 371. This legislation merely states that the person liable for the tax is “…the person receiving or entitled to the interest”. Of course, the person receiving the interest is not necessarily the same as the person entitled to the interest; more on this point later.
The general rule in s 371 that the person liable for tax is the person receiving or entitled to the interest is subject to two exceptions; firstly, where the joint account is held by spouses or civil partners; and secondly, where the ‘settlements’ anti-avoidance provisions apply.
Spouses and civil partners
There is separate legislation dealing with jointly held property in the names of spouses or civil partners who are living together (ITA 2007, s 836). The basic rule is that the individuals are treated for income tax purposes as beneficially entitled to the income in equal shares. However, this ‘50:50 rule’ is subject to various exceptions which are broadly as follows:
A. Income to which neither of the individuals is beneficially entitled.
B. Income subject to a declaration of unequal beneficial interests (see below).
C. Partnership income (within ITTOIA 2005, Pt 9).
D. Income from a commercial UK furnished holiday lettings business (within ITTOIA 2005, Pt 3, Ch 6).
DA. Income from a commercial overseas furnished holiday lettings business in an EEA state (within ITTOIA 2005, Pt 3, Ch 6).
E. Distributions from: (a) Close company shares or securities to which one of the individuals is beneficially entitled to the exclusion of the other; or (b) Such shares or securities to which the individuals are beneficially entitled in equal or unequal shares.
F. Income to which one of the individuals is beneficially entitled so far as it is treated as a result of any other provision of the Income Tax Acts as: (a) the income of the other individual, or (b) the income of a third party.
The relevant exception in this case is exception B, i.e. income subject to a declaration of unequal beneficial interests. There is legislation dealing with this exception (ITA 2007, s 837), which broadly applies if the spouses or civil partners are beneficially entitled to both the income and the underlying asset in unequal shares (for example 70:30). The joint declaration is usually made on a Form 17, which is available on HMRC’s website.
If the individuals make a valid joint declaration, and submit it to HMRC within 60 days, the effect is that each spouse or civil partner is taxed on the income according to their beneficial entitlement (which as mentioned might be 70:30, for example), rather than on a 50:50 basis. That split of income would apply with effect from the date of the declaration. It continues to apply until permanent separation, divorce or death, or until there is a change in the beneficial interest of either spouse or civil partner, in either the asset or the income. In practice, the couple can end the declaration such as by making a small change in the beneficial entitlements; for example, by making a gift which changes their beneficial interests from 70:30 to 60:40.
In HMRC’s view, these tax rules on spouses and civil partners do not apply to a joint account between them if there are additional account holders such as children. This view was shared by the First-tier tribunal in a recent case (see below).
As mentioned, there is a second exception to the general rule in ITTOIA 2005, s 371 that the person taxable in respect of interest income is the person who receives or is entitled to it. The second exception is where the ‘settlements’ anti-avoidance provisions apply (ITTOIA 2005, Pt 5, Ch 5). Those provisions broadly treat income from a settlement as being the settlor’s for income tax purposes if the settlor retains an interest in the settlement (s 624). The rules can also treat interest on accounts held by unmarried minor children as being the income of their parent(s), if the funds originated from the parent and the interest exceeds £100 per parent (s 629).
In the context of joint bank or building society accounts, a ‘settlement’ could be the account itself, and the ‘settlor’ could be one of the joint account holders if, for example, it is a family member who provided all the funds in the account.
A recent First-tier tribunal case looked at this very issue. In Bingham v Revenue & Customs  UKFTT 110 (TC), the taxpayer, Mr Bingham, a married man with three children, successfully practised as a solicitor for many years. He originally held a number of personal deposit accounts in his own name. However, he subsequently decided to consolidate his savings by placing the funds into a single account, in the joint names of himself and his wife. Subsequently, the couple’s children were added as joint account holders, and other accounts also became held in the joint names of Mr Bingham, his wife and children. Mr Bingham was the sole provider of the funds in those accounts.
Interest on the accounts was initially apportioned according to the number of account holders. Thus for five account holders, they would each include 20% of the interest earned in their tax returns. However, Mr Bingham subsequently apportioned interest between each account holder so that each of them could make use of their personal allowances and lower rate income tax bands. Mr and Mrs Bingham intended that the monies in the accounts could be used by any of the children if needed, although Mr Bingham’s name remained on the accounts, and he remained an account signatory.
HMRC raised income tax assessments on Mr Bingham for 2006/07 to 2009/10 inclusive, and also discovery assessments for 1996/97 to 2005/06 inclusive. The tribunal had to consider whether all of the interest on the accounts held in the joint names of Mr Bingham and the other family members was taxable on Mr Bingham alone. The tribunal accepted that Mr Bingham intended the monies in the accounts to be a “family fund” on which any of the joint account holders except Mr Bingham himself could draw from if needed. However, the tribunal considered that in legal terms this arrangement was an informal family settlement, of which Mr Bingham was the settlor. He had remained as a signatory on the accounts, and the tribunal held that Mr Bingham had retained an interest in the funds. This meant that he was liable to account for all the interest earned. HMRC’s income tax assessments for 2005/06 to 2009/10 were therefore confirmed.
However, the tribunal went on to discharge the discovery assessments for 1996/97 to 2004/05 inclusive, on the basis that there had been no negligence on the part of Mr Bingham, who had honestly but incorrectly believed that he was entitled to apportion the interest according to what he believed to be the beneficial interests of the family members in the accounts. In addition, the tribunal set aside HMRC’s penalty assessments, on the basis that Mr Bingham had not been negligent, nor careless or deliberate in his conduct.
It is interesting to note that counsel for Mr Bingham had argued that the ’50:50 rule’ (in what is ITA 2007, s 836) extended to situations where children have been added to an account held in the joint names of a husband and wife. However, as mentioned the tribunal considered that this provision is limited to husbands and wives, and said that extending its provisions to children of the family was “…unjustified and wholly without authority”.
Reference was also made in the Bingham case to the legal concept of a ‘resulting trust’. The principle of a resulting trust is broadly that if, for example, a parent provides 100% of the funds in a joint bank account held with an adult son or daughter, there is a presumption of a resulting trust, i.e. that the funds will ‘result’ (or revert back) to the parent. Consequently, the parent would be taxable on 100% of the interest earned on the account. However, this presumption of a resulting trust can be rebutted if there is evidence to the contrary. For example, if there was evidence that the parent had intended to gift 50% of the funds to the son or daughter, then the presumption of a resulting trust is displaced, and each account holder would generally be taxable on the interest based on their beneficial ownership of the funds in the bank account (i.e. 50% each). The presumption of a resulting trust can also be displaced by an express trust, which is normally in writing but may sometimes be oral (see TSEM9630).
HMRC’s Trusts Manual provides some interesting examples of joint accounts, including an example of a ‘resulting trust’ involving parent and adult daughter (at TSEM9947), where the parent contributes 100% of the funds in a savings account in their joint names, but they allocate the interest on a 50:50 basis. The presumption is that there is a resulting trust in favour of the parent, and in the absence of any counter presumption, the parent is taxable on 100% of the interest.
HMRC provides another example in the trusts manual, at TSEM9948. It involves a joint bank account between husband, wife and adult child, in which the husband provided all the funds in the account, so the circumstances are not dissimilar to the Bingham case. In HMRC’s example, the bank interest is divided between the account holders equally, i.e. one third each. HMRC states that because there is no evidence that the husband has transferred beneficial ownership to his wife and adult child, the husband remains taxable on all the interest.
Finally, HMRC guidance provides an example involving a ‘declaration of trust’ (at TSEM9951). That example once again involves a joint bank account between husband, wife and adult child, in which the husband has contributed all the funds in the account. This time, the husband does not self-assess any of the interest, on the basis that none of it belongs to him, and that his wife and adult child should be taxed on the interest on a 50:50 basis. He produces a declaration of trust stating that the bank interest belongs to his wife and adult child. However, HMRC warns that even if the declaration is valid, it only applies to interest credited after the date of declaration. In addition, even if the right to the income had been validly transferred, HMRC’s view is that as there is no evidence that the right to ownership of the funds in the bank account has been transferred, the settlements legislation applies. In other words, HMRC’s approach in the example is the same as that taken in the Bingham case.
The message from the tribunal in the Bingham case, and also HMRC’s examples in the trusts manual, seems to be that it is not enough to simply give away a right to interest on a bank or building society account. A right to the underlying capital must be given away as well. The comments of the tribunal judge in Bingham also suggest that the person providing the funds in the account must have no control over what is given away. This would seem quite difficult to achieve on the face of it, particularly where all of the family members are account signatories. It would probably be easier to have separate accounts for each family member, and to give each of them control over their own account, although in practice there may be reasons why this is not possible.
The above article is reproduced from ‘Practice Update’ (May/June 2013), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.