My mother has a joint bank account with my grandmother who unfortunately passed away a couple of months ago.
Is the money held in the account part of my grandmother’s estate?
Or does it count as my mother’s and fall outside of my grandmother’s estate?
Markus, via email
Joint bank accounts that are owned between parents and their children could be subject to IHT
Myron Jobson, of This is Money, replies: This is a good question as joint accounts are common, though mostly between spouses.
The inheritance tax rules are different for parents leaving wealth to their children, and it’s more likely that the tax will apply in these cases where an estate exceeds the inheritance tax-free threshold.
We’ve asked a chartered financial planner to give you an idea of the different considerations.
Ray Black, managing director of chartered financial advisory firm Money Minder Financial Services, writes: With a joint bank account, when one of the account holders dies, the surviving account holder inherits the deceased’s share of the money and gains complete control of the account.
Leaving money to charity can help to reduce the amount of your IHT bill , says Ray Black of Money Minder Financial Services
Whether IHT is payable is dependent on two main points:
- The relationship between the deceased owner and the surviving owner
- The amount of money involved and the size of the deceased owner’s estate
In the case of joint accounts owned between a married couple or partners in a civil partnership, no inheritance tax would be payable, irrespective of the amounts involved, thanks to the spouse exemption rules.
However, this is NOT the case for joint accounts that are owned between parents and their children.
If the value of the deceased parent’s estate is over £325,000, IHT may be payable at a standard rate of 40 per cent on the amount above that figure.
In principle, only half the value of an equally-owned joint account would be taken in to account when calculating the size of the deceased parent’s estate as the other half was, in legal terms, considered to be the surviving owner’s money already
In your specific example, it’s very important to know that if all of the money in that account originally came from your grandmother and it was less than seven years ago that the money was effectively ‘gifted’ to the child.
In other words, you need to figure out when your mother was added to the joint account or when the money was paid in to the account from your grandmother’s other assets.
If the money came entirely from your grandmother, then HMRC could consider the entire value of her account to be part of her estate, thus making it liable for inheritance tax. Likewise if a larger proportion of the money came from her.
But a further IHT tax exemption may also apply
Having said that, the first £325,000 of an individual’s estate is exempt from inheritance tax anyway, and a further exemption that allows an individual to pass on some or all of the value of their main residence free of inheritance tax (called the ‘residence nil rate band’) may also be available.
Currently, that’s worth an extra £125,000 per person, however, on 6 April 2019 it goes up to £150,000 and then increases to £175,000 on 6 April 2020.
The residence nil rate band is only valid when the property was the main residence of the deceased and when the person(s) inheriting the property are direct descendants (ie. children, step-children and grandchildren).
The nil rate band allowances are transferable for married couples and those in a civil partnership which means that at present up to £900,000 can be passed on free of inheritance tax.
In 2020, it will rise to £1million, made up of two parents’ allowances of £325,000 each plus two times £175,000. It’s half this amount for single people.
Finally, although the standard rate of inheritance tax payable is 40 per cent of the amount above the relevant nil rate bands available, for those who leave at least 10 per cent of the net value of their estate to charity, the rate of inheritance tax payable reduces from 40 per cent to 36 per cent.
There are no limits to the amount someone can leave to charity so this could help to reduce the amount of inheritance tax payable significantly.
HAVE YOU SORTED OUT YOUR WILL?
Make sure you’ve got the basics covered before starting inheritance tax planning. Read a This is Money guide to sorting out a will here.
Myron Jobson adds: Your mother’s position will become clearer once the value of your grandmother’s estate is known.
Assuming your grandmother left a will, the executor is responsible for calculating the value of the estate – which takes into account money, property and possessions – and informing the taxman.
Some people choose to hire a solicitor who specialises in probate to help with some or all of the tasks involved with valuing an estate.
If you are privy to your grandmother’s finances, you could get a rough idea of what the IHT tax bill might look like by using our IHT calculator.