Joint accounts: when a simple solution creates unexpected tax surprises

Your son helps with your finances. Your daughter lives nearby and can deal with the bank. Or perhaps you simply want to make life easier if your health deteriorates.

So, you add their name to your bank account.    

Simple? Not necessarily.

What many people do not realise is that adding someone as a co-holder may amount to a gift, alter who inherits the funds on death and trigger unexpected tax consequences. Nor are these issues confined to UK bank accounts. A UK resident individual may face UK tax consequences even where the account itself is located overseas. Equally, non-UK residents may encounter UK tax or succession issues where a UK account is involved.

Indeed, joint accounts frequently feature in cross-border families. Perhaps you live in the UK but hold savings overseas. Perhaps you have moved abroad but retained a UK account. Or perhaps a child who lives in another country has been added to help manage your finances.

In all of these situations, a seemingly simple arrangement can trigger unexpected tax and succession issues. The answers will depend on factors such as your residence, your inheritance tax status, the location of the account and the assets it contains. In short, crossing borders often makes an already complex area even more complicated.

The first surprise: you may already have made a gift

Many people assume that adding a name to an account is merely an administrative convenience. English law does not always agree.

Depending on the circumstances, adding another person as a co-holder may do far more than give them administrative access. In law, it may amount to a gift of part of the account. If so, the funds transferred may no longer belong to you, may pass outside your Will and could have significant tax consequences. Whether a gift has actually been made depends on a number of factors, including whether there was an intention to transfer ownership and whether the relevant legal formalities have been completed.

The second surprise: the gift may come with a UK tax bill

1. Inheritance tax: HMRC looks at what you do, not what you call it.

The surprise does not end once a gift has been made. A transfer that is effective for legal purposes may have inheritance tax ('IHT') implications on the donor's death. 

A gift to anyone other than a spouse is usually a potentially exempt transfer (PET). Survive seven years and the gift will generally fall outside your estate for IHT purposes. Die sooner and some or all of the value may be subject to IHT at 40%, depending on the timing.

Furthermore, if you continue using the money as though it still belongs to you, HMRC may ignore the planning entirely. This is known as the 'gift with reservation of benefit' rule.

In other words, if you add your child to an account but continue to withdraw from it, receive the income or treat the funds as your own the gift will still be effective, but the account could still be treated as part of your estate on death and taxed accordingly.

The lesson? You cannot have your cake and eat it. To remove an asset from your estate for IHT purposes, you generally need to give up the benefit of it too.

2. Capital gains tax: the tax people forget about

When discussing gifts, most people focus on IHT. Yet capital gains tax ('CGT') is often where the most immediate problem arises.

This is because, under UK tax law, a gift is treated as a disposal, even though no money changes hands. This distinction matters greatly depending on what is being transferred. 

Cash can usually be transferred without triggering capital gains tax. Investments are different.

If the account contains shares or other assets that have increased in value, adding another person as a co-holder may be treated as a disposal for CGT purposes. The result? A tax charge can arise on the increase in value of the investments even though no money has changed hands.

3. Income tax: the surprises do not stop once the gift has been made

Transferring ownership of an account does not itself trigger an income tax charge. But once a genuine gift has been made, the tax on future income may shift too. 

In simple terms, if you have given away part of an account, some of the interest, dividends or other income generated by the account may become taxable on the new co-holder. This can come as a surprise where the arrangement was intended merely as an administrative convenience rather than a transfer of wealth.

For spouses and civil partners, there is a further complication.   As a general rule, HMRC assumes that income arising on jointly owned assets held by spouses belongs equally to each spouse for income tax purposes, regardless of who contributed the funds or who owns the larger share.

The result can be unexpected. A spouse who owns only a small interest in an asset may still be taxed on half of the income it produces unless the appropriate steps are taken to notify HMRC of the true ownership position.

So, adding someone to an account can change not only who owns the asset, but also who pays tax on the income it generates.

Trying to make life easier? There is often a better option.

Many people add a child or relative to an account simply so that someone can help if they become unwell. If that is the objective and the account is in the UK, a Lasting Power of Attorney for Property and Financial Affairs is often a cleaner and safer solution. It allows another person to assist without changing ownership of the assets or creating unexpected tax consequences.

The bottom line

What looks like a simple administrative change can, in reality, be a gift, a succession decision and a tax planning exercise all at the same time.

Before turning an account into a joint account, make sure you understand what you are giving away, who will inherit it and how HMRC might view the arrangement.