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4 April 2013 | Comment | Article by Samantha Roberts TEP

Mine, yours or ours? Gifts with reservation of benefit

Samantha Roberts discusses the pitfalls of making gifts to family members whilst retaining some form of benefit.

When administering an estate, most families are unaware of what is known as a ‘gift with reservation of benefit’, often referred to as a GROB. This means that a donor (person making the gift) gifts to another person such as their son, daughter or other family member (the donee) a lump sum or property but retains an interest, for example income from the cash or continuing to live in a property rent free.

Following the change from Enduring Powers of Attorney to Lasting Powers of Attorney, many people have opened accounts in joint names in the hope that this will assist them whilst looking after an older family member. What most people don’t realise is the account or property will be included for the purposes of calculating any potential inheritance tax.

In the recent case of Matthews v HMRC [2012] UKFTT 658 (TC) an estate passed in its entirety from a mother (‘the deceased’) to her son (‘Mr Matthews’). The question which was raised was whether the full balance in an account held in joint names should be subject to inheritance tax on the basis that it was a gift with reservation of benefit. The answer, confirmed by the First Tier Tribunal, was that it was and therefore should attract inheritance tax. In the Matthews case, the deceased previously held an account in her sole name from money inherited from her father. At a later date the deceased opened a new account in the joint names of her and Mr Matthews and which contained the whole sum from the sole account. The pass book contained the words ‘either signature’ and it was agreed that either the deceased or Mr Matthews could remove monies from the account without the agreement of the other.

During the period from the joint account being opened to the date of death no further deposits nor withdrawals were made to the account and interest alone was added. Both parties also included one-half shares of interest on their own tax returns.

The matter came to the attention of HM Revenue & Customs due to the completion of the inheritance tax return. Mr Matthews had stated in addition to the above that the deceased had not made a gift or any other transfer of value on or after the 18 March 1986 but did hold assets jointly with him. Mr Matthews also confirmed that the whole sum was provided by the deceased. However, the value included was only half of the whole value as at the date of death.

It was observed by the First Tier Tribunal Judge that the information provided was inconsistent in that it was stated that, on death and due to survivorship, one-half of the account passed to Mr Matthews. It was also stated that Mr Matthews should have been able to explain what agreement was in place between him and the deceased and also how withdrawals or deposits were to be dealt with. It was also stated that the deceased or Mr Matthews could withdraw funds up to the total amount deposited. The First Tier Tribunal Judge also referred to the case of Sillars v IRC [2004] STC (SCD) 180 confirming that that:

“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 … The joint account was plainly not settled property I do not accept that if the deceased had needed more than one-half of the initial balance the excess would have been a gift by Mr Matthews. It is much more realistic to regard the deceased as having power to deal with the account as she thought fit…. The account was held beneficially as joint tenants. The gift was of a chose in action consisting of the whole account, not one half of the initial balance. It follows that possession and enjoyment of the account had not been assumed by Mr Matthews because the Deceased was still entitled to a share; and nor had it been enjoyed to the exclusion of the Deceased and of any benefit to her as all benefits from the account were enjoyed by the Deceased.”

The lesson to be learnt from this is that any accounts or assets which are to be held in joint names but where just one party provides the whole of the balance will be included for inheritance tax purposes. This is unless there is clear evidence to the contrary. It is clear from this case that any gift between family members should be recorded in the event that queries are raised on the basis of the gift.

Author bio

Samantha Roberts is a Partner at Hugh James and works in the managed probate team of asset management.

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